What are dividends? Which is more cost-effective: cash dividends or stock dividends?

Public companies typically return profits to shareholders in the form of dividends. However, there is more than one way to distribute dividends. What are dividends, how to choose, and how to calculate them are questions that often confuse investors. This article will approach from a practical investment perspective to help you understand the essence of dividends.

Two Core Methods of Dividend Distribution: Cash and Stock

When a listed company has profits after repaying debt and covering losses, it considers rewarding shareholders. What are dividends? Simply put, it is a way for the company to distribute profits to investors proportionally based on their shareholding.

Dividend distribution methods are mainly divided into two categories:

First: Cash Dividends. The company directly deposits cash into investors’ accounts. This method requires the company not only to be profitable but also to have sufficient cash flow to support the payout without affecting normal operations. Investors receiving cash must pay taxes, with the tax rate linked to the holding period.

Second: Stock Dividends. The company distributes new shares to shareholders free of charge, directly increasing the number of shares held by investors. This method requires less cash from the company and can be executed as long as dividend conditions are met, without worrying about cash flow sufficiency.

The choice of dividend method depends on the company’s financial situation and development stage. Companies with ample cash and good liquidity tend to pay cash dividends; companies in need of retaining cash to support expansion will choose to issue new shares.

When Do Dividends Occur? The Complete Dividend Process

Different markets have different dividend frequencies. Most Taiwanese stocks pay dividends annually, while US stocks usually pay quarterly, with some companies paying semi-annually. Dividend plans must be approved by the shareholders’ meeting and disclosed in financial reports.

The complete dividend process includes four key dates:

Announcement Date: The company announces the dividend plan, including the amount, method, and schedule.

Record Date: This is the critical date to determine who is eligible to receive the current dividend. As long as you hold the company’s stock before (and including) this date, you can participate in the dividend, even if you sell afterward.

Ex-Dividend Date: Usually the trading day after the record date. Investors who buy on or after this date are not entitled to this dividend. The stock price typically jumps on this day, which is a normal market adjustment.

Dividend Payment Date: The date when the company officially transfers the dividend funds or shares into investors’ accounts.

From the disclosure of financial reports to investors actually receiving dividends may take 2-4 months. For example, if a company discloses its annual report in February, investors might receive dividends in April; if disclosed in April, then in June.

Dividends Are Not Inevitable

It is important to note that not all profitable companies pay dividends. Many enterprises, even with profits, choose to retain cash if they face major projects or expansion plans. For growth-oriented companies, the gains from stock price appreciation often far exceed dividend amounts, and not paying dividends aligns better with long-term strategic development.

Companies that do not pay dividends also have other ways to reward shareholders: Stock Splits and Share Buybacks.

A stock split means dividing one share into multiple shares; the company’s total market value and shareholders’ ownership proportion remain unchanged, but the number of shares increases and the share price decreases. This can attract more investors and indirectly boost the stock price.

A share buyback involves the company purchasing its own stock and canceling or holding as treasury stock. This reduces the total number of shares outstanding, increases net asset value per share, and can push up the stock price. Additionally, buybacks signal to the market that the stock is undervalued, boosting investor confidence.

Practical Calculation of Dividends

Stock Dividend Calculation

Suppose an investor holds 1000 shares of a company, and the company decides to distribute stock dividends with a rate of 10% (1 new share for every 10 shares held).

Calculation:

• Shares to be distributed = 1000 × 10% = 100 shares
• Total shares after distribution = 1000 + 100 = 1100 shares

The investor’s shareholding increases, but the company’s total share capital also expands, diluting the value represented by each share.

Cash Dividend Calculation

Holding 1000 shares, if the company decides to pay a cash dividend of 5 yuan per share.

Calculation:

• Total cash dividend = 1000 × 5 = 5000 yuan
• Assuming a personal tax rate of 5%, actual received = 5000 × (1 - 5%) = 4750 yuan

The investor’s cash increases, but the company’s cash assets decrease accordingly.

( Mixed Dividend Calculation

Some companies distribute both stock and cash simultaneously. For example, every 10 shares receive 1 new share plus 2 yuan cash.

Calculation:

• Stock dividend = 1000 ÷ 10 = 100 shares
• Cash dividend = 1000 × 2 = 2000 yuan
• Final benefit = 100 new shares + 2000 yuan cash

Price Adjustment Mechanism After Ex-Dividend and Ex-Right

After dividend declaration, the stock price usually drops, which is an automatic market adjustment.

Principle of Ex-Dividend: When cash dividends are distributed, the company’s net assets decrease, and the asset value per share declines, leading to a corresponding drop in stock price. The calculation formula is: Ex-dividend price = Closing price on record date - per-share cash dividend

Principle of Ex-Rights: When new shares are issued, the total share capital increases but the company’s total market value remains unchanged, diluting the value per share, and the stock price drops accordingly. The calculation formula is: Ex-right price = Closing price on record date ÷ (1 + rights issue rate)

When Both Are Distributed: Ex-rights and ex-dividend price = Closing price on record date - (per-share cash dividend ÷ (1 + rights issue rate))

After ex-dividend and ex-rights, the stock price will show a gap. To maintain continuity in candlestick charts, the market provides adjusted prices: pre-adjusted (backward) adjusts historical prices downward to connect with current prices; post-adjusted (forward) adjusts current prices upward to connect with historical prices.

Post-Dividend Price Trends: Fill-Right and Under-Right

Dividend announcements send a positive signal to the market about the company’s good management, boosting investor confidence. After ex-dividend and ex-rights, the stock price becomes relatively cheaper, often attracting investors to buy at lower prices.

Fill-Right refers to the stock price rising after dividends, returning to or exceeding pre-dividend levels, resulting in a real increase in investors’ total wealth.

Under-Right means the stock price continues to decline after dividends, and investors do not benefit from the dividend payout, suffering losses instead.

Fill-Right trends are most favorable for investors, as they enjoy both the dividend income and capital gains from stock price appreciation.

Cash Dividends vs Stock Dividends: Which Is Better?

From an investor’s perspective: Most investors prefer cash dividends because the cash received can be freely used, invested elsewhere, or withdrawn, giving them control. Additionally, cash dividends do not increase the company’s share capital, so the investor’s ownership ratio and earnings per share are not diluted.

However, cash dividends have the downside of taxation; the actual amount received is reduced by taxes.

From a company’s perspective: Paying cash means cash outflow, which can strain liquidity, especially for companies with tight cash flow, potentially limiting investment and expansion plans. Paying cash also requires profitability and sufficient cash reserves.

In contrast, issuing new shares imposes less financial pressure on the company, especially suitable for rapidly growing companies.

Long-term investment view: If a company develops well, the gains from stock price appreciation often far exceed dividend amounts. Although stock dividends do not provide immediate cash, they can generate more substantial returns over the long term. This approach is particularly suitable for long-term investors.

How to Check Dividend Information

) Official Channels

Corporate websites usually publish dividend announcements and compile historical dividend records. Investors can directly visit the company’s official website for detailed information.

Exchange Channels

For example, in the Taiwanese market, investors can check the Taiwan Stock Exchange official website’s market announcements for ex-rights and ex-dividend notices and calculation tables. These documents detail each company’s dividend plan and ex-rights results, traceable back to 2003 (Minguo 92).

Information obtained through these official channels is the most accurate and comprehensive, serving as an important reference for investors’ dividend decision-making.