A comprehensive guide to stock dividend calculations: cash dividends or stock dividends, which method is more cost-effective?

The Choice Behind Dividends: Why Do Listed Companies Pay Dividends?

After earning profits, listed companies distribute a portion of their earnings to shareholders, a practice known as dividend payout or distribution. However, there are different ways to distribute dividends—some companies pay cash directly, while others choose to send stock. This reflects the company’s judgment on its cash flow and future development.

Why are there two methods of dividend distribution? The fundamental reason lies in the company’s financial condition and strategic considerations. Paying cash dividends requires the company to have sufficient cash on hand and to ensure that dividend payments do not affect normal operations; in contrast, issuing stock dividends has a lower threshold—so long as the distribution criteria are met, even with tight cash flow, it can be done. For companies in expansion phases, issuing stock dividends aligns better with long-term interests.

Stock Dividends vs Cash Dividends: How Should Investors Choose?

What is a stock dividend?
A stock dividend is a distribution of additional shares to shareholders at no cost, directly credited to the investor’s share account. The result is an increase in the number of shares you hold, but this is not a windfall—total assets do not truly increase after the ex-dividend date; only the number of shares increases. For example, Cathay Financial might distribute 1 share for every 10 shares held: a holder of 1,000 shares would receive an additional 100 shares, but the share price would decrease proportionally.

What is a cash dividend?
A cash dividend is a direct payment of cash into the investor’s account. For example, Hon Hai (Foxconn) might pay a dividend of NT$5.2 per share; holding 1,000 shares would yield NT$5,200. Before tax, this amount is received; after deducting approximately 5% tax, the actual amount received will be less.

Which is better?
Most investors prefer cash dividends because they can be freely used and do not dilute ownership. However, from a company’s perspective, cash dividends reduce liquidity and limit the ability to develop new projects; stock dividends, on the other hand, retain cash for expansion and operations.

In the long run, if the company develops well, the gains from stock price appreciation often far exceed those from cash dividends. This means that, for long-term investors, stock dividends may actually bring greater returns.

How to Calculate Stock Dividends: Practical Teaching of Three Distribution Methods

Pure stock dividend method:
Calculation formula = (Existing shares ÷ Denominator of the distribution ratio) × Numerator of the distribution ratio

For example, Cathay Financial distributes 1 share for every 10 shares:

• Original holdings: 1,000 shares
• Dividend calculation: (1000 ÷ 10) × 1 = 100 shares
• After distribution: 1,000 + 100 = 1,100 shares

Pure cash dividend method:
Calculation formula = Existing shares × Dividend per share

For example, Hon Hai pays NT$5.2 per share:

• Original holdings: 1,000 shares
• Dividend amount: 1,000 × 5.2 = NT$5,200
• After tax (5%): NT$5,200 × 0.95 = NT$4,940

Mixed distribution method:
Distribute both stock and cash simultaneously; the calculation combines the above two methods. For example, 1 share for every 10 shares plus a NT$1 dividend per share. A holder of 1,000 shares would receive 100 shares plus NT$1,000 in cash.

The Substance of Ex-Dividend and Ex-Rights: Why Does the Stock Price “Gap Down”?

After dividend announcements, investors often see the stock price “suddenly” drop. This is not bad news but a technical adjustment—ex-dividend or ex-rights.

Logic of ex-dividend:
After cash dividends are paid, the company’s net assets decrease, and the per-share asset value declines accordingly. The stock price adjusts by the dividend amount.
Calculation:

• Ex-dividend price = Closing price on the record date - Cash dividend per share
  For example, if the stock price is NT$66 and the dividend is NT$10, the next day’s ex-dividend price = NT$66 - NT$10 = NT$56. It appears to drop NT$10, but investors have received NT$10 in cash, so their total value remains unchanged.

Logic of ex-rights:
After issuing new shares, the total number of shares increases but the total market value remains the same, so each share’s value decreases.
Calculation:

• Ex-rights price = Closing price on the record date ÷ (1 + distribution ratio)
  For example, if the stock price is NT$66 and the company issues 1 new share for every 10 shares (distribution ratio 0.1), the next day’s ex-rights price = NT$66 ÷ 1.1 ≈ NT$60. Although the number of shares increases, the per-share value decreases proportionally, keeping total assets roughly the same.

Mixed distribution ex-rights and ex-dividends calculation:

• Ex-rights and ex-dividend price = (Closing price on record date - Cash dividend per share) ÷ (1 + distribution ratio)
  For example, stock price NT$66, cash dividend NT$1, and 1 for 10 shares:
• Price = (66 - 1) ÷ 1.1 ≈ NT$59.09

How Does the Stock Price Move After Dividends: Fill the Rights vs. Keep the Rights

After ex-dividend and ex-rights, the stock price can follow two paths:

Fill the rights/dividends:
The company’s dividend payout sends a positive signal, boosting investor confidence. Capital flows in, pushing the stock price back up to pre-dividend levels. Investors receive both dividends and stock appreciation, achieving dual gains.

Keep the rights/dividends:
The stock price continues to decline after the payout, failing to recover to pre-dividend levels. This often reflects investor pessimism about the company’s future prospects.

Whether the price “fills” or “sticks” depends on multiple factors: company fundamentals, overall market performance, investor sentiment, etc. Dividend payout alone does not guarantee gains; it acts as a catalyst, and the real return depends on whether the stock price can rebound after the payout.

Dividend Frequency and Payment Schedule

Different markets have distinct dividend practices. Taiwanese stocks often distribute dividends annually, with some companies paying semi-annually or quarterly. U.S. companies generally pay quarterly dividends, resulting in more frequent payouts.

Typical dividend schedule:

1. Announcement date: Company announces dividend plan
2. Record date: Confirms the list of shareholders eligible for dividends; stocks purchased on or before this date are entitled
3. Ex-dividend date: Usually one trading day before the record date; stocks purchased on or after this date are not entitled to the current dividend
4. Payment date: The actual date dividends are paid

Note that not all profitable companies pay dividends every year. If a company faces cash shortages, needs large investments, or is expanding, it may suspend dividends even if profitable. Maintaining stable dividends is rare and valuable.

Other Ways Non-Dividend-Paying Companies Reward Shareholders

Companies that do not pay cash dividends still reward shareholders through other means:

Stock splits:
A single share is divided into multiple shares; total market value and ownership proportion remain unchanged, but the number of shares increases and the share price decreases. Lower share prices may attract more retail investors, indirectly boosting stock price and shareholder wealth.

Share buybacks:
The company repurchases its own shares, either canceling them or holding as treasury stock. This reduces the total number of shares outstanding. The decrease in share count increases net asset value per share, potentially raising the stock price, and signals to the market that the stock is undervalued, boosting investor confidence.

How to Check a Company’s Dividend Information

Via the company’s official website:
Listed companies publish dividend announcements and often compile historical dividend records, making it easy for investors to track.

Via stock exchange websites:
For example, in Taiwan, you can check the Taiwan Stock Exchange’s official site for ex-dividend and ex-rights notices and calculation tables. These tables include detailed historical dividend data and are the most authoritative sources.

Summary
Calculating stock dividends may seem complex, but the core logic is straightforward. Cash dividends provide direct income but reduce company liquidity; stock dividends retain cash but dilute per-share value. Long-term investors should focus not just on the dividend method but on the company’s fundamentals and post-dividend stock performance—filling the rights is the key to realizing actual gains.