Dividend payout or stock distribution? Investors must know the dividend issuance mechanism and the difference in returns

Public companies typically reward shareholders through dividends after turning a profit. However, there are two methods of dividend distribution—cash dividends or stock dividends—which may seem similar but have significantly different implications for actual returns and impact. Today, let’s break down this logic.

Two Approaches to Dividend Distribution: Cash vs. Stock

When a company decides to distribute dividends, it chooses one or a combination of the two methods.

Cash dividends involve directly transferring money into shareholders’ accounts. The prerequisite is that the company has sufficient earnings and cash reserves, and that paying dividends won’t affect normal operations. This method demands more from the company—cash paid out is real money, which directly reduces the company’s liquidity.

Stock dividends involve issuing new shares free of charge. The threshold is much lower; as long as the distribution criteria are met, even if the company’s cash is tight, it can proceed. From an accounting perspective, this converts book profits into share capital without involving actual cash outflows.

In practice, annual dividends are most common. Most Taiwanese stocks adopt annual dividends, while US stocks often pay quarterly. Dividend plans require approval at the shareholders’ meeting and must be disclosed in financial reports.

Timeline for Dividend Distribution

From announcement to actual receipt, several steps are involved:

Announcement Date: The company announces the dividend plan
Record Date: The cutoff date; shareholders holding stock before this date are eligible for the dividend
Ex-dividend/ex-rights Date: Usually one trading day after the record date; stocks bought after this date do not receive the current dividend
Distribution Date: The official payout of dividends

The entire process duration depends on the financial report disclosure timeline, and from announcement to receipt can take several months. It’s important to note that not all profitable companies pay dividends every year. Some use their funds for project operations or expansion, and may not distribute dividends even if they have earnings.

Practical Calculation of Dividends

Different dividend methods involve different calculation logic.

When only cash dividends are paid:

• Number of shares × Dividend per share = Actual received amount
• For example, holding 1000 shares with a dividend of 5 yuan per share, pre-tax earnings = 5000 yuan
• After 5% tax, actual received = 4750 yuan

When only stock dividends are paid:

• Number of shares ÷ Stock ratio = Additional shares
• For example, holding 1000 shares, with a 10-for-1 stock dividend, then (1000 ÷ 10) × 1 = 100 new shares

When both are paid:

• Calculate both cash and stock portions simultaneously
• For example, holding 1000 shares, receiving 100 new shares plus 2 yuan cash, resulting in 100 shares + 2000 yuan cash

Remember to consider tax factors during calculation. Cash dividends are subject to personal income tax, with rates depending on the holding period.

How to Calculate Ex-dividend/Ex-rights Price?

After dividend distribution, stock prices typically experience a technical decline, known as “ex-dividend/ex-rights.” Many investors get nervous seeing the stock price drop, but this is normal.

Ex-dividend price (cash dividends only):

• Formula: Closing price on record date - cash dividend per share
• For example, if the price is 66 yuan and the dividend is 10 yuan, the next-day ex-dividend price = 66 - 10 = 56 yuan

Ex-rights price (stock dividends only):

• Formula: Closing price on record date ÷ (1 + stock ratio)
• For example, if the price is 66 yuan and a 10-for-1 stock dividend (ratio 0.1), next-day ex-rights price = 66 ÷ 1.1 ≈ 60 yuan

Mixed dividend ex-dividend price:

• Formula: Closing price on record date - (cash dividend ÷ (1 + stock ratio))
• For example, if the price is 66 yuan, with 1 stock + 1 yuan cash dividend, next-day ex-dividend/ex-rights price ≈ 66 - 1 ÷ 1.1 ≈ 59.1 yuan

Rights Filling vs. Rights Selling: How Do Stock Prices Move After Dividends?

The change in stock price after dividends determines the investor’s real gains.

Rights Filling / Rights Enjoyment:
After dividend payout, the stock price rebounds to pre-dividend levels, allowing investors to benefit from price appreciation, effectively realizing dividend gains.

Rights Selling / Rights Loss:
After dividend payout, the stock price continues to decline, meaning investors are “cut” in the process.

The stock price trend depends on investors’ expectations of the company’s future prospects after dividend distribution. Dividends send a positive signal—indicating good development and the ability to distribute profits. If the market is optimistic, investors will buy at lower prices, pushing the stock higher; if not, the opposite occurs.

Cash Dividends vs. Stock Dividends: Which Is More Profitable?

For investors: Cash dividends are more straightforward. Receiving cash allows free allocation, with no dilution (since paying cash doesn’t increase shares), and after-tax benefits are immediate. However, taxes are payable, and dividend payouts reduce liquidity, potentially limiting future growth.

For companies: Stock dividends are easier—they don’t consume cash, only increase share capital, and have less financing pressure. But this may indicate cash shortages, representing “paper profits” rather than real cash.

Long-term perspective: If a company develops well, the appreciation of stock value often exceeds cash dividends. Companies that consistently pay dividends and exchange old shares for new ones, as long as their performance continues to grow, will ultimately provide shareholders with higher returns. This is why long-term investors favor stock dividends—they reflect confidence in future growth.

In simple terms, cash dividends are “cash in hand,” while stock dividends are a “long-term gamble.” Investors with high risk tolerance and confidence in the company’s prospects are suited for stock dividends; conservative investors seeking stable cash flow prefer cash dividends.

How to Check a Company’s Dividend Record?

To understand a company’s historical dividend behavior, there are two channels:

Company Official Website: Listed companies disclose dividend announcements and historical records, detailing each payout amount and method.

Stock Exchange Official Website: For example, in Taiwan, you can check the Taiwan Stock Exchange’s ex-rights and ex-dividend notices and calculation tables, with data dating back to 2003 (Minguo 92). Before new stocks are listed, these resources help understand the company’s dividend practices and stability.

Checking dividend records helps assess the company’s dividend stability. Companies that pay dividends consistently are rare; most adjust payouts based on operational conditions. Stable dividend-paying companies often indicate healthy cash flow and stable management, making them attractive investment targets.