Comparison of Dividend Payment Methods: Stock Dividends vs Cash Dividends, Which Is More Beneficial for Investors?

When listed companies turn a profit, they often return a portion of the profits to shareholders, which is called dividends (distribution). But there are more than one way to distribute dividends—some companies pay cash directly, some issue stock, and some do both. For investors, understanding the differences among these dividend methods is key to managing investment returns more wisely.

Cash Dividends vs Stock Dividends: The Fundamental Difference Between Two Dividend Types

The core logic of dividends is quite simple: companies have profits to distribute to shareholders. How do they do it?

Cash dividends mean paying out money directly—companies convert profits into cash and deposit it into shareholders’ accounts. The advantage is that shareholders receive real cash they can freely use for other investments, without increasing their shareholding passively.

Stock dividends are issued as additional shares—also called “bonus shares” or “stock splits.” Companies issue free additional shares to shareholders’ accounts, increasing their total number of shares. This method is more attractive to companies because it doesn’t require actual cash outlay, only meeting certain dividend distribution conditions.

For companies, paying cash dividends is more demanding—must be profitable, have sufficient cash on hand, and ensure normal operations aren’t affected. Stock dividends have a much lower threshold—they can be used even when cash is tight.

When Are Dividends Paid? A One-Stop Look at the Distribution Process

Listed companies typically pay dividends annually or quarterly. Taiwanese listed companies mostly distribute annual dividends, while US companies tend to pay quarterly. The dividend plan must be approved at the shareholders’ meeting and announced in the financial report disclosure.

From the announcement to actually receiving dividends, shareholders go through several key dates:

• Announcement Date: Company announces dividend news
• Record Date: Determines the list of shareholders eligible for dividends (shareholders holding shares before this date are entitled)
• Ex-Dividend/Ex-Rights Date: Usually the trading day after the record date; buying shares on this day or later means you won’t receive this period’s dividends
• Distribution Date: The official date when dividends are paid out

Note that even if you sell shares on the ex-dividend/ex-rights date, it doesn’t affect your entitlement to dividends—the dividend rights are fixed on the record date.

Practical Dividend Calculation Formulas: How to Calculate Three Common Dividend Methods

After deciding to distribute dividends, companies set the distribution plan based on allocation ratios. Here are three common dividend calculation formulas:

Pure Cash Dividend

Suppose a shareholder owns 1,000 shares, and the company decides to pay NT$5.2 per share:

• Dividend payout = 1,000 × 5.2 = NT$5,200
• After tax (assuming 5%) = NT$5,200 × 0.95 = NT$4,940

Pure Stock Dividend

Similarly, holding 1,000 shares, the company decides to issue 1 new share for every 10 shares (stock split ratio 0.1):

• Shares issued as dividend = 1,000 ÷ 10 = 100 shares
• Total shares after dividend = 1,000 + 100 = 1,100 shares

Mixed Dividend

Holding 1,000 shares, with a 1-for-10 stock split and NT$1 cash dividend:

• Stock portion = 1,000 ÷ 10 = 100 shares
• Cash portion = 1,000 × 1 = NT$1,000
• Final holdings: 100 shares + NT$1,000 cash

How Do Ex-Rights and Ex-Dividend Affect Stock Price? The Math Behind Dividend Price Calculations

Before and after dividends, stock prices often fluctuate significantly, involving the concepts of “ex-dividend” and “ex-rights”:

Ex-Dividend Principle: After cash dividends are paid, the company’s net assets decrease, leading to a drop in per-share asset value, and thus, the stock price declines.

• Ex-dividend price = Closing price on record date − per-share cash dividend

Ex-Rights Principle: When a company issues additional shares, total share capital increases but market value remains unchanged, diluting the value per share, causing the stock price to decrease.

• Ex-rights price = Closing price on record date ÷ (1 + stock split ratio)

Mixed Dividend Ex-Rights Price:

• Ex-rights price = Closing price on record date − (cash dividend per share ÷ (1 + stock split ratio))

Example: A company’s closing price on record date is NT$66, and it issues 1 new share for every 10 shares (ratio 0.1) and pays NT$1 dividend:

• Ex-rights price = NT$66 − NT$1 ÷ (1 + 0.1) = NT$66 − NT$0.91 ≈ NT$65.09

After ex-dividend/ex-rights, stock prices often show a gap. Trading software usually offers “pre-adjusted” and “post-adjusted” views to help investors see the true price movements.

How Dividends Affect Shareholders’ Returns in Practice

Dividends themselves don’t directly increase wealth, but they signal good corporate performance. After dividends are paid, stock prices tend to fall, making shares cheaper. Investors optimistic about the company’s prospects may buy in at lower prices, pushing the stock back up—this is called “rebound” or “fill the gap.” If the stock continues to decline, it’s called “discounted” or “discounted dividend.”

For shareholders, the key is whether a rebound occurs after dividend distribution:

• Rebound scenario: Shareholders receive dividends and the stock price rises again, leading to double gains
• No rebound scenario: Stock price drops by the dividend amount, offsetting the dividend, resulting in no net gain

Long-term, if a company operates steadily, the appreciation of stock value often exceeds dividend income. Therefore, dividend-paying stocks are more suitable for long-term investors seeking compound growth; cash dividends are better for investors who prefer to “lock in” gains.

Cash Dividends vs Stock Dividends: Which Is More Cost-Effective?

Advantages for shareholders:

Cash dividends are straightforward—real cash credited, no increase in share count, no dilution, and high flexibility. The downside is that they are taxable, with tax rates depending on holding period.

Stock dividends are tax-free and can enable compound growth through continuous dividend reinvestment. However, issuing more shares dilutes earnings per share temporarily, and in the short term, shareholders’ ownership percentage remains unchanged—only the “size” of their holdings increases.

Considerations for companies:

Distributing cash dividends reduces cash reserves and impacts liquidity, especially burdensome for cash-strapped firms. Stock dividends don’t deplete cash but increase share capital.

Companies That Don’t Pay Dividends Also Have Return Methods

Not all companies pay dividends. Some fast-growing firms choose stock splits or share buybacks to reward shareholders:

Stock Split: Dividing 1 share into multiple shares, increasing share count but lowering share price, attracting more investors and potentially boosting stock price.

Share Buyback: The company repurchases its own shares, reducing outstanding shares, increasing earnings per share and stock price, and signaling undervaluation to the market.

How to Check a Company’s Dividend Records and Plans

Company Website: Listed companies usually publish dividend announcements, and some compile historical dividend records for reference.

Stock Exchange Website: For example, in Taiwan, you can check the ex-dividend and ex-rights forecast tables and calculation results on the Taiwan Stock Exchange website. These records trace back to 2003.

Using these resources, investors can gain a comprehensive understanding of a company’s dividend practices and stability, enabling more rational investment decisions.