Stock dividends vs cash dividends: How should investors choose?

Public companies typically distribute a portion of their profits to shareholders through dividends after becoming profitable. But did you know? There are two completely different ways to receive this return—one is receiving cash directly, and the other is receiving more shares. Today, let’s discuss the fundamental differences between these two dividend methods and which one is more beneficial for your investment.

Two Forms of Dividends: Stock Dividends vs. Cash Dividends

When a company decides to distribute dividends, there are generally two options:

Cash Dividends (派息): The company directly deposits cash into your account, and what you receive is real money. This method requires the company to have sufficient cash reserves and must not affect its daily operational liquidity. Because of these strict conditions, not many companies can maintain stable annual dividends.

Stock Dividends (送股): The company distributes new shares to your stock account free of charge, increasing your number of shares directly. This method requires less cash from the company, as long as the distribution criteria are met, so many companies prefer this approach.

For example: If you hold 1,000 shares of a company, and the company decides to give 1 share for every 10 shares held, you will receive an additional 100 shares, and your account will now have 1,100 shares.

How to Calculate Stock Dividends? Let’s look at a practical example

Theoretically, it sounds complicated, but it’s clear with an example.

Pure Stock Dividend: Suppose you hold 1,000 shares, and the company decides to distribute 1 share for every 10 shares held. The calculation is:

• Distribution ratio = 1 ÷ 10 = 0.1
• New shares received = 1,000 × 0.1 = 100 shares
• Final share count = 1,000 + 100 = 1,100 shares

Pure Cash Dividend: Suppose you hold 1,000 shares, and the company decides to pay 5.2 yuan per share:

• Cash to be received = 1,000 × 5.2 = 5,200 yuan
• Assuming a 5% tax, actual received = 5,200 × 0.95 = 4,940 yuan

Mixed Approach: Some companies use both methods simultaneously, for example, paying 1 share for every 10 shares plus 1 yuan cash per share. You can increase your share count and receive cash at the same time.

The Complete Process of Dividend Distribution

After a company announces dividends, it goes through several important dates:

1. Announcement Date: The company officially announces the dividend plan.
2. Record Date (股權登記日): Shareholders who hold shares on this date (inclusive) are eligible to participate in the dividend distribution.
3. Ex-Dividend Date (除權除息日): Usually the trading day after the record date. Buying shares after this date does not entitle you to this period’s dividends.
4. Distribution Date (派發日): The date when dividends are officially credited to your account.

Note that shares can be traded on the ex-dividend date, and selling your shares does not affect your entitlement to dividends.

The Essence of Ex-Dividend and Ex-Rights: Why Does the Stock Price Drop?

Many investors notice that stock prices often decline after dividend announcements. This is not a bad thing but a market adjustment mechanism.

Ex-Dividend Principle: After paying cash dividends, the company’s net assets decrease, and the actual value per share drops, leading to a corresponding decrease in stock price.

• Calculation formula: Ex-dividend price = Closing price on record date - Cash dividend per share
• Example: If the stock price is 66 yuan and a 10 yuan dividend is paid, the next day’s price becomes 56 yuan.

Ex-Rights Principle: After distributing new shares, the company’s total share capital increases, but the total market value remains unchanged. The value per share is diluted, causing the stock price to fall.

• Calculation formula: Ex-rights price = Closing price on record date ÷ (1 + distribution ratio)
• Example: If the stock price is 66 yuan and 1 share is given for every 10 shares (distribution ratio 0.1), the next day’s price becomes 60 yuan.

This downward adjustment is normal and necessary; it rebalances the actual value of the stock. The total value of your assets remains unchanged; only the form has shifted.

Fill-Back vs. Price Support: The True Source of Investor Returns

After ex-dividend and ex-rights, the stock price becomes cheaper. At this point, the market’s subsequent movement depends on its confidence in the company’s prospects:

Fill-Back Market: The stock price gradually recovers to the pre-ex-dividend level. The gains from buying at a lower price, combined with dividends, create double returns. This scenario is most favorable for investors.

Price Support Market: The stock price continues to decline after ex-dividend and ex-rights, resulting in no profit and further losses.

Simply put, dividends themselves do not directly increase your wealth; the real gains come from the stock price rising after ex-dividend and ex-rights. Therefore, whether a dividend is worthwhile depends on the company’s future development prospects that can support a stock price rebound.

Cash Dividends vs. Stock Dividends: Which Should Investors Choose?

Both dividend methods have advantages and disadvantages, depending on your investment goals and risk tolerance.

Advantages of Cash Dividends:

• You receive cash immediately, with no change in stock quantity.
• Investors can decide how to allocate this cash freely.
• Does not dilute existing shareholders’ ownership proportion.

Disadvantages of Cash Dividends:

• Subject to taxes; tax rate depends on holding period.
• Puts pressure on the company’s cash flow, possibly limiting growth.
• Once spent, cash is gone; lacks long-term appreciation potential.

Advantages of Stock Dividends:

• No taxes are paid; increases the number of shares held.
• The company retains cash, preserving liquidity.
• If the company develops well, the gains from stock price appreciation can far exceed cash dividends.
• Suitable for long-term investors seeking compound growth.

Disadvantages of Stock Dividends:

• Dilutes the actual equity per share (though total equity remains unchanged).
• You need to wait for the fill-back period to realize gains.
• Not friendly to investors with immediate cash needs.

In the long run, if you believe in the company’s growth prospects, stock dividends have greater potential. Because your share count increases, and if the stock price rises, your gains are amplified. But if you need cash or are uncertain about the company’s future, cash dividends are more stable.

How to Check a Company’s Dividend Plan?

To find out whether a stock pays dividends and the dividend ratio, you can use several methods:

Company Website: Most listed companies publish dividend announcements on their official websites, and some compile historical dividend records.

Stock Exchange: For example, in Taiwan, you can check the Taiwan Stock Exchange’s ex-dividend and ex-rights forecast tables and calculation results, which include many years of dividend data.

Investment Software: Many trading platforms and apps provide information on dividend dates, amounts, and more, making inquiries very convenient.

Final Advice

Dividends are one way for companies to reward shareholders, but not the only way. Some companies do not pay dividends but instead buy back shares or split stocks to increase shareholder value. Companies that do not distribute dividends may still generate substantial returns through stock price appreciation.

Choosing between stock dividends and cash dividends essentially reflects your investment style: cash dividends suit conservative income-focused investors, while stock dividends are better for those seeking long-term growth. Understanding how both work, and aligning your choice with your actual needs and risk tolerance, is the wisest approach.