The difference between stock dividends and cash dividends: How do investors choose the most suitable dividend method?

When listed companies achieve profitability, they typically distribute a portion of the remaining earnings to shareholders after repaying debts and covering past losses. This process is called dividend distribution and is an important channel for investors to obtain returns. However, different companies adopt vastly different distribution methods; some pay out cash directly, others distribute stock, and some use a hybrid approach. This article will analyze in depth the mechanisms, calculation methods, and the actual impacts of stock dividends and cash dividends on investors and enterprises.

Two Main Forms of Dividend Distribution

Shareholder dividends are mainly divided into two categories: Stock Dividends (also called bonus shares or scrip dividends) and Cash Dividends (also called payout).

Stock dividends are issued by listed companies to shareholders free of charge, directly credited to investors’ share accounts, increasing the number of shares held but maintaining the same ownership proportion. In contrast, cash dividends are directly transferred by the company into investors’ cash accounts.

From a corporate perspective, both methods have their pros and cons. Distributing cash dividends requires the company to have sufficient earnings and ample cash flow, which can put pressure on liquidity and subsequent investment capacity. Distributing stock dividends has a relatively lower threshold; companies do not need large cash reserves and can implement it even when cash is relatively tight. This is why growth-oriented companies tend to prefer distributing stock rather than cash.

Dividend Payment Schedule and Process

Most listed companies pay dividends once a year, although semi-annual or quarterly dividends also exist. In Taiwan’s stock market, annual dividends are common, while U.S. companies often adopt quarterly dividend payments. Dividend distribution usually occurs after the company releases its financial report, with specific timing varying by company.

The dividend distribution follows a standardized process: first is the Announcement Date, when the company announces the dividend plan; next is the Record Date, when the company registers shareholders eligible for dividends; then is the Ex-Dividend Date (usually the trading day after the record date), after which investors purchasing shares will not receive the current period’s dividend; finally, is the Distribution Date, when dividends are officially credited to investors’ accounts. It’s worth noting that investors can trade stocks on the ex-dividend date without affecting their entitlement to the dividend.

Additionally, not all profitable companies pay dividends every year. If a company needs substantial funds for business expansion or major projects, it may choose to retain earnings even if profitable. In such cases, companies might use stock splits or share buybacks as alternative ways to return value to shareholders.

Practical Calculation of Stock Dividends

Understanding dividend calculation methods is crucial for investors assessing returns. Companies usually determine the payout amount based on a distribution ratio and then formulate specific plans.

Pure Stock Dividend Example: Suppose an investor holds 1000 shares, and the company decides to distribute 1 stock for every 10 shares held. The calculation is: (1000 ÷ 10) × 1 = 100 shares. After distribution, the investor’s total shares will increase to 1100.

Pure Cash Dividend Example: The same investor holds 1000 shares, and the company pays a cash dividend of 5.2 yuan per share. The calculation is: 1000 × 5.2 = 5200 yuan. After deducting 5% tax, the actual credited amount is 5200 × 0.95 = 4940 yuan.

Hybrid Distribution Example: A company may also adopt a combined approach. For example, distributing 1 stock for every 10 shares plus 4 yuan in cash. The investor would ultimately receive a combined benefit of 100 shares plus 4000 yuan in cash.

Application of Cash Dividend Calculators and Ex-Dividend Calculations

Ex-dividend and ex-right calculations involve complex mathematical formulas, but the core principles are relatively straightforward. After cash dividends are distributed, the company’s net assets decrease, and the net asset per share declines accordingly, leading to a drop in stock price, known as Ex-Dividend. After stock dividends are distributed, the total share capital increases but the total market value remains unchanged; each share’s implied value decreases, and the stock price adjusts downward, known as Ex-Rights.

Investors can use cash dividend calculators and ex-dividend/ex-right tools to quickly determine the adjusted stock price:

Pure Cash Dividend Ex-Dividend Price: Ex-dividend price = Record Date closing price – per-share cash dividend

For example, if a company’s record date closing price is 66 yuan and it pays a cash dividend of 10 yuan per share, the next day’s ex-dividend price = 66 – 10 = 56 yuan.

Pure Stock Dividend Ex-Rights Price: Ex-right price = Record Date closing price ÷ (1 + allotment ratio)

If the company distributes 1 share for every 10 shares (allotment ratio 0.1), then ex-right price = 66 ÷ 1.1 ≈ 60 yuan.

Mixed Cash and Stock Dividend Ex-Rights/Ex-Dividend Price: Ex-rights/ex-dividend price = (Record Date closing price – per-share cash dividend) ÷ (1 + allotment ratio)

Suppose a 1 yuan cash dividend plus a 0.1 allotment ratio, then the calculation is (66 – 1) ÷ 1.1 ≈ 59.09 yuan.

Long-term Performance Comparison of Stock Dividends and Cash Dividends

Investors tend to prefer cash dividends mainly because of their immediacy and liquidity. After cash is credited, investors can freely choose investment targets and do not dilute their existing equity. However, cash dividends are subject to income tax, with rates depending on holding period and jurisdiction.

From a company perspective, excessive cash dividend payouts can reduce available cash flow, limiting new project development and business expansion, which can be especially harmful for companies with tight liquidity.

In the long run, if a company develops steadily, the gains from stock appreciation often far surpass those from cash dividends. Stock dividends, as the company grows, increase in value, creating substantial returns for long-term investors. Compared to the “immediate cash-out” of cash dividends, stock dividends are more suitable for patient investors seeking long-term growth.

Impact of Ex-Rights and Ex-Dividend on Stock Price and Investor Wealth

After ex-rights and ex-dividends occur, stock prices typically decline sharply, but this is not necessarily a negative signal. Distributing dividends essentially means the company distributes profits to shareholders; if the stock price recovers to pre-dividend levels after ex-dividend and ex-rights adjustments, investors not only receive dividends but also retain the stock’s value. This phenomenon is called Price Recovery or Fill-Back. Conversely, if the stock price continues to decline, it is called Price Discount or Ex-Right/Ex-Dividend Discount.

Dividend distribution signals strong profitability and promising growth prospects, often attracting new investors and driving stock prices higher. The lower stock prices after ex-rights/ex-dividends provide better buying opportunities, especially for investors optimistic about the company’s future.

To maintain visual continuity in stock price trends, technical analysis introduces the concept of Adjusted Price. Pre-adjusted price adjusts the price before ex-rights/ex-dividends downward to the current level, Post-adjusted price adjusts the price after ex-rights/ex-dividends upward to historical levels, and Unadjusted price remains unchanged. Different adjustment methods influence technical analysis outcomes.

Ways to Check Company Dividend Information

Investors need to understand a company’s dividend plans and history. There are mainly two channels:

Official Company Channels: Most listed companies publish dividend announcements on their official websites, and some compile historical dividend records for investor reference.

Stock Exchange Websites: For example, in Taiwan, the Taiwan Stock Exchange provides ex-rights/ex-dividend notices and calculation tables, allowing investors to access detailed dividend data of various companies over recent years. This information is crucial for formulating investment strategies.