What is dividend distribution? Which is more cost-effective, cash dividends or stock dividends? A must-read guide for investors

Investors naturally expect to share in a company’s operational results after holding listed company stocks. When a company is highly profitable, repays debts, and offsets past losses, it will return some of its profits to shareholders in the form of dividends. This dividend distribution mechanism fundamentally falls into two main categories: one is direct cash dividends, and the other is free stock issuance. Which of these two dividend methods is more suitable for investors? This article will delve into the operational logic, calculation methods, and how to determine which type of dividend is more beneficial for oneself.

What is a dividend? The essential difference between the two dividend methods

Dividends refer to the periodic distribution of a company’s profits to shareholders, with the amount depending on the shareholder’s stake and the company’s articles of incorporation.

Dividends are divided into two main types:

Cash dividends (dividends, dividend payouts): The company directly deposits cash into the investor’s account. Investors receive real money immediately but must pay personal income tax, with the tax rate linked to the holding period.

Stock dividends (stock dividends): The company issues new shares to investors free of charge, directly increasing their shareholding. No tax is payable, but the total share capital increases, and each share’s ownership in the company is diluted.

The choice of dividend method depends on the company’s financial situation. Paying cash requires sufficient cash reserves and does not harm liquidity, making it relatively higher threshold; while stock dividends are more flexible, as long as the dividend distribution conditions are met, they can be implemented even if cash is insufficient.

When are dividends paid? Clarifying the payout process

Most listed companies adopt an annual dividend system, which is especially common in the Taiwan stock market; US stocks typically pay quarterly dividends. The dividend plan must be approved by the shareholders’ meeting and disclosed in the financial report.

Four key dates for dividend distribution

Announcement date: The company announces the dividend news, and the market learns the detailed plan.

Record date: The company confirms which shareholders are entitled to receive the dividend for this period. As long as shares are held before (or on) this date, the shareholder can participate in the dividend.

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 official date when the company distributes dividends, with cash credited or new shares credited.

How is the dividend calculated? Demonstration of three scenarios

Scenario 1: Pure cash dividend

Example: A company pays a dividend of 5.2 yuan per share to an investor holding 1000 shares

Calculation: 1000 shares × 5.2 yuan/share = 5200 yuan cash dividend

After withholding tax (assumed 5% personal tax): 5200 × 0.95 = 4940 yuan received

Scenario 2: Pure stock dividend

Example: A company issues 1 new share for every 10 shares held; an investor holds 1000 shares

Calculation: (1000 shares ÷ 10) × 1 = 100 shares

Total shares after dividend: 1000 + 100 = 1100 shares

Scenario 3: Mixed cash and stock dividend

A company distributes both cash and stock, e.g., 1 new share per 10 shares plus 1 yuan cash

Dividend content: 100 new shares + 1000 yuan cash (1000 shares × 1 yuan/share)

Interpreting the “ex-dividend” and “ex-right” phenomena after dividend distribution

After dividend announcement, the stock price usually drops significantly; this is not a bad thing but the effect of the ex-dividend/ex-right mechanism.

What is ex-dividend?

After the company distributes cash, the company’s net assets decrease, and the net asset value per share drops accordingly, leading to a decrease in stock price.

Ex-dividend price formula: Closing price on record date - cash dividend per share

Example: Price is 66 yuan, dividend per share is 1 yuan → next day ex-dividend price = 66 - 1 = 65 yuan

What is ex-right?

After the company issues new shares as dividends, the total share capital expands, but the total market value remains unchanged, causing the value per share to be diluted, and the stock price to decrease.

Ex-right price formula: Closing price on record date ÷ (1 + stock issuance ratio)

Example: Price is 66 yuan, with 1 new share issued for every 10 shares (issuance ratio 0.1) → next day ex-right price = 66 ÷ 1.1 ≈ 60 yuan

How will stock prices develop after ex-right and ex-dividend?

Two possible trends:

Fill the rights and fill the dividends: The stock price gradually recovers to the pre-ex-right/ex-dividend level, allowing investors to profit.

Underperform the rights and undercut the dividends: The stock price continues to decline, falling below the pre-ex-right/ex-dividend level, resulting in investor losses.

Cash dividends vs stock dividends, which should investors choose?

Both dividend methods have pros and cons; investment decisions should be adjusted based on personal goals.

Advantages and disadvantages of cash dividends

Investor perspective:

• ✓ Cash in hand, high flexibility, can choose new investments freely
• ✓ Does not dilute shareholder rights, maintaining proportional ownership
• ✗ Must pay personal income tax, reducing net gains
• ✗ Missed opportunities for compound growth

Company perspective:

• ✗ Requires sufficient cash reserves, may impact liquidity
• ✗ Limits funds available for R&D and expansion
• ✗ Excessive dividends in tight liquidity situations may cause financial difficulties

Advantages and disadvantages of stock dividends

Investor perspective:

• ✓ No tax payable, dividends fully credited
• ✓ Long-term compound growth, suitable for buy-and-hold strategies
• ✗ Increased number of shares but diluted per-share value
• ✗ Actual ownership does not increase, only “paper wealth”

Company perspective:

• ✓ No cash outflow, retains ample liquidity
• ✓ Flexibility to allocate funds for business expansion

Who should choose cash dividends? Who should choose stock dividends?

Cash dividends: Suitable for short-term investors, retirees needing cash flow, or investors neutral about the company’s prospects.

Stock dividends: Suitable for long-term holders, optimistic about the company’s growth potential, or investors seeking compound returns.

Statistics show that if a company maintains healthy growth, the gains from stock price appreciation often far exceed the dividends themselves. In such cases, stock dividends increase the number of shares held, allowing investors to benefit from future stock price increases with greater leverage.

How to check a company’s dividend record and dividend plan?

Method 1: Check the company’s official website

Listed companies publish dividend announcements on their official websites, detailing dividend plans, payout schedules, and payout history. Major companies like TSMC, Occidental Petroleum, etc., regularly update data, allowing investors to review historical dividend information.

Method 2: Check the stock exchange

For example, in Taiwan, listed companies’ information can be found on the Taiwan Stock Exchange’s official website under market announcements:

• Ex-right/ex-dividend forecast table
• Ex-right/ex-dividend calculation results

These calculation result tables cover all companies’ dividend information since 2003 and are important tools for analyzing dividend trends.

Besides dividends, what other ways do companies return value to shareholders?

Not all profitable companies necessarily pay dividends. Some choose to return value through stock splits or share repurchases.

Stock split: Dividing one share into multiple shares, lowering the share price to attract retail investors, thereby boosting the stock price. Total shareholder equity and ownership proportion remain unchanged.

Share repurchase: The company buys back its own shares, which are then canceled or held as treasury stock, reducing total shares outstanding, increasing net asset value per share, signaling undervaluation, and stimulating stock price rise.

In the long run, well-managed companies create value for shareholders primarily through stock appreciation, which surpasses dividend payouts. Investors should consider the company’s growth stage, financial health, and market outlook comprehensively to make the most suitable dividend choice.