How to calculate earnings distribution? A big comparison between stock dividends and cash dividends

When listed companies become profitable, they often return some earnings to shareholders in the form of dividends. However, there is more than one way to distribute dividends; companies can choose to pay cash or issue additional shares. Each method has its advantages and disadvantages, and their impact on investors is completely different.

Two Faces of Dividend Distribution: Stock Dividends vs. Cash Dividends

When a company decides to distribute earnings, it faces a fundamental choice: either issue stock or pay cash.

Stock issuance (stock dividends/equity dividends) refers to the company distributing new shares to shareholders free of charge. These shares are directly deposited into investors’ accounts, increasing their shareholding. This method exerts less pressure on the company’s cash reserves and can be executed as long as the company meets the stock issuance conditions, even if cash on hand is insufficient.

Cash dividends involve directly distributing profits in cash to shareholders, credited to their investment accounts. This method requires the company to have sufficient earnings and cash reserves; otherwise, it can affect liquidity and normal operations.

When and How Does the Distribution Occur?

Corporate dividend distributions are usually annual, with some companies paying semi-annually or quarterly. Prior to distribution, shareholder approval is required at the general meeting, and the stock issuance plan is disclosed in the financial report. The specific timing depends on when the company releases its financial statements—earlier reports mean shareholders receive dividends sooner.

The entire distribution process involves four key dates:

Announcement Date: The company announces the dividend distribution information
Record Date: Determines the shareholders eligible for stock issuance; only those holding shares on or before this date can participate
Ex-Dividend and Ex-Rights Date: Usually the day after the record date; buying shares on this date or later does not entitle the buyer to the current period’s dividends, but the shares can still be traded
Distribution Date: The official date when dividends are paid

Practical Calculation of Stock Dividends

Suppose an investor holds 1,000 shares of a company:

Pure stock issuance plan: The company issues 1 new share for every 10 shares held, so the investor receives (1,000 ÷ 10) × 1 = 100 new shares, increasing their total to 1,100 shares.

Pure cash plan: The company pays 5 yuan per share, so the investor receives 1,000 × 5 = 5,000 yuan in cash (which may be approximately 4,750 yuan after tax).

Mixed plan: 100 shares issued plus 4,000 yuan in cash, so the investor receives both stock and cash simultaneously.

What is Ex-Dividend and Ex-Rights? How Does It Affect Stock Price?

After a company distributes dividends, the stock price will undergo a noticeable adjustment, known as ex-dividend and ex-rights.

Ex-dividend principle: After paying cash dividends, the company’s net assets decrease, and the value of each share’s assets declines accordingly, causing the stock price to fall. For example, if the closing price on the record date is 66 yuan and the dividend per share is 10 yuan, the ex-dividend price the next day would be 66 - 10 = 56 yuan.

Ex-rights principle: After issuing new shares, the company’s total share capital increases but market value remains unchanged. The ownership per share is diluted, and the stock price adjusts accordingly. If the closing price on the record date is 66 yuan and the company issues 1 new share for every 10 shares (a 0.1 issuance ratio), the ex-rights price the next day would be 66 ÷ (1 + 0.1) = 60 yuan.

Mixed ex-dividend and ex-rights: For companies that distribute both dividends and issue new shares simultaneously, the calculation is more complex. For example, with a 1 yuan dividend, a 0.1 issuance ratio, and a closing price of 66 yuan on the record date, the next day’s ex-dividend and ex-rights price would be (66 - 1) ÷ (1 + 0.1) = 59.09 yuan.

Stock Issuance or Cash Dividends? How Should Investors Choose?

For shareholders, cash dividends have the advantage of being received immediately, allowing free use of the funds and not diluting ownership proportion. However, they are subject to taxation, and may be less friendly to companies seeking rapid expansion.

Stock dividends offer tax advantages and are suitable for long-term holders who want to gradually increase their holdings. The downside is that issuing more shares dilutes EPS, and the stock price may be pressured downward after ex-rights.

From a long-term perspective, if a company develops steadily and its stock price continues to rise, the benefits from stock issuance often surpass those from cash dividends. Many growth-oriented companies prefer issuing stock to retain cash for R&D and expansion, which also indicates confidence in future growth.

How to Check a Company’s Stock Issuance Plan?

Official channels: Visit the company’s official website to review dividend announcements and historical distribution records.

Stock exchange inquiries: Search the local stock exchange’s website for ex-dividend and ex-rights notices and calculation tables, which can trace back several years of stock issuance data.

Investment software: Most trading platforms and investment apps provide features to view upcoming stock issuance plans and historical records.

Understanding stock issuance helps investors better grasp how companies reward shareholders and enables smarter decisions before and after ex-dividend and ex-rights dates, capturing “recovery” opportunities to enhance returns.