Cash dividends and stock dividends are very different! An article covering the calculation and selection strategies for stock issuance and dividend distribution

Two Ways of Distributing Dividends: Cash or Stock?

After investors purchase shares and become shareholders, one of the most anticipated events is receiving the company’s dividend returns. When a listed company completes debt repayment and loss coverage, it will return remaining profits to shareholders through dividend distribution (dividends). However, during this process, the company faces a choice: distribute cash or stock?

These two methods each have their characteristics. Cash dividends mean the company directly deposits cash into investors’ accounts, requiring sufficient liquidity on the company’s books. Stock dividends involve the company issuing new shares to shareholders free of charge, which places less demand on the company’s cash flow and can be implemented as long as dividend distribution conditions are met. The choice depends on the company’s actual financial situation and strategic considerations.

Stock Dividends vs. Cash Dividends: How Do Investors Choose?

For investors, cash dividends are attractive for their certainty and flexibility. Once received, they can decide how to reinvest the funds and it does not increase the total share capital, avoiding dilution of ownership. However, they are subject to taxation, and the actual amount received will be reduced after taxes.

Stock dividends represent long-term growth potential. Distributing stock means increasing the number of shares held. If the company develops well and the stock price continues to rise, the gains from this increase can far surpass cash dividends. Especially for growth companies, stock dividends often become a “compound interest” investment tool, suitable for investors willing to hold long-term.

The key criterion is: how much growth potential does the company have? If optimistic about the company’s prospects, the compound return effect of stock dividends is more significant; if preferring stable cash flow, cash dividends are more suitable.

Practical Calculation of Rights Issue and Dividend Distribution

Understanding how to calculate is essential for investors participating in dividends. Suppose an investor holds 1,000 shares, and the calculation results differ greatly depending on the distribution method.

Cash Dividend Calculation Example: Suppose the company declares a dividend of 5 yuan per share. Then, 1,000 shares will receive 5,000 yuan in cash. After deducting 5% tax, the actual credited amount is 4,750 yuan. This money goes directly into the funds account and can be withdrawn immediately or reinvested.

Stock Dividend Calculation Example: Suppose the company distributes 1 new share for every 10 shares held, with a distribution ratio of 0.1. The investor holding 1,000 shares will receive 100 new shares, increasing their holdings to 1,100 shares. The number of shares in the account increases, but the stock price will be adjusted accordingly.

Mixed Distribution Calculation Example: Some companies distribute both cash and stock simultaneously. For example, distributing 1 new share for every 10 shares and 4 yuan in cash. An investor with 1,000 shares will receive 100 new shares plus 4,000 yuan in cash, achieving a “double harvest.”

Ex-Dividend and Ex-Rights: The Truth About Stock Price Drop

Many investors wonder why stock prices fall after dividends are paid. This involves the concepts of ex-dividend and ex-rights.

Ex-dividend occurs in the case of cash dividends. After the company pays cash, its net assets decrease, and the value per share drops accordingly, leading to a decline in stock price. The calculation is: Ex-dividend price = closing price on the record date - cash dividend per share.

Ex-rights occurs in the case of stock dividends. The issuance of new shares increases the total share capital, but the company’s total market value remains unchanged. The value per share is diluted, causing the stock price to fall. The calculation is: Ex-rights price = closing price on the record date ÷ (1 + distribution ratio).

The price decline is not a loss for investors but a market adjustment. The investor’s actual wealth (number of shares × adjusted stock price) remains unchanged.

Complete Timeline of Dividend Distribution

Distributing dividends is not an instant process; it involves several key dates.

Announcement Date: The company announces the dividend plan and specific ratio.

Record Date: This is a critical point. As long as you hold the company’s stock on or before this date, you are entitled to receive the dividend for this period. Many investors buy shares just before this date to qualify.

Ex-rights and Ex-dividend Date: Usually the trading day after the record date. Buying shares on this day means you cannot enjoy this period’s dividend, but holding shares before this date and selling on or after it does not affect dividend entitlement.

Distribution Date: The date when dividends are officially transferred to investors’ accounts. Cash dividends go into the funds account, stock dividends into the shareholding account.

Rights Issue, Payout, and Investment Opportunities

After the ex-rights and ex-dividend, stock prices decline, but the subsequent trend varies depending on the company’s strength.

Filling the rights (填權) refers to the stock price rebounding to the level before the ex-dividend/ex-rights drop. This indicates the market’s positive outlook on the company, with the dividend payout signal being fully absorbed. Investors see both an increase in share count and a recovery in stock price, gaining double benefits.

Post-discount (貼權) is the opposite: after the dividend, the stock price continues to decline below the pre-ex-dividend/ex-rights level. This often reflects market concerns about the company’s future performance.

Smart investors use the decline after ex-dividend/ex-rights as an opportunity, provided they are optimistic about the company’s prospects, to buy at lower prices and wait for the filling the rights trend. This is a core strategy for many dividend-focused investors.

How to Check a Company’s Dividend Record

Having access to historical dividend data helps assess a company’s dividend tradition and stability.

Company official website is the most direct source. Most listed companies publish dividend announcements on their websites, and some compile years of dividend records, allowing investors to clearly see the company’s dividend history and regularity.

Stock exchange official website is also an important information source. For example, in Taiwan, investors can check the Taiwan Stock Exchange’s market announcements for ex-rights/ex-dividend notices and calculation results, with data dating back to 2003 (Minguo 92), including comprehensive dividend and distribution calculations for all companies.

Through these channels, investors can build a dividend history profile for each company, assess dividend stability, regularity, and overall returns, providing data support for long-term investment decisions.

Company Strategies Behind Dividend Policies

Not all profitable companies pay dividends every year. Some choose to retain earnings for business expansion, new product development, or technological investments. From another perspective, companies that do not pay dividends but see their stock prices continue to rise are also rewarding shareholders in their own way.

Additionally, stock splits and share buybacks are alternative ways for companies to return value to shareholders. Stock splits divide one share into multiple shares, attracting more investors and indirectly boosting the stock price. Share buybacks involve the company repurchasing its own shares to reduce total shares outstanding and increase earnings per share, signaling that the stock is undervalued. These strategies, combined with dividend policies, form the company’s overall shareholder return system.

Understanding dividend distribution, payout calculations, and related market mechanisms can help investors make more precise investment decisions.