Comprehensive Guide to Dividend Distribution Knowledge | Stock Dividends vs Cash Dividends, Which Is More Beneficial for Your Wallet?

Preface: Why Shareholders Should Care About Dividends

After purchasing a company’s stock, besides waiting for the stock price to rise, there is an important income source that is often overlooked—dividend distribution. When a company profits, it will allocate part of the earnings to shareholders, which is commonly known as dividends. Depending on the company’s articles of incorporation and the shareholder’s ownership percentage, the dividend amounts received by different shareholders vary.

So, the question is: Does the company pay you directly in cash, or does it give you stock? Which method is more cost-effective for you? This article will explain from a practical perspective the differences between stock dividends and cash dividends, and how to calculate stock splits and dividends.

Two Methods of Dividend Distribution

Method 1: Stock Dividend (Stock Dividend)

The company distributes new shares to shareholders free of charge, directly credited to your share account. Your number of shares increases, but this does not mean you are richer—this is a way of “sharing the pie” rather than “making the pie bigger.”

Example: You hold 1,000 shares of Cathay Financial. The company decides to issue 1 stock dividend for every 10 shares held, so you will receive 50 new shares, and your total shares will become 1,050.

Method 2: Cash Dividend

The company directly transfers cash into your funds account. This method is more straightforward and flexible. However, note that cash dividends are subject to taxation, with the rate depending on the holding period.

Example: You hold 1,000 shares of Hon Hai. The company pays 5.2 yuan per share as cash dividend, so you receive 5,200 yuan in cash. After deducting 5% tax, the actual amount received is 4,940 yuan.

Method 3: Hybrid Distribution

Some companies distribute both stock and cash dividends. For example, issuing 1 stock dividend for every 10 shares and paying 4 yuan per share in cash. Investors can thus enjoy both stock and cash benefits simultaneously.

Why Do Companies Choose Different Dividend Methods?

Distributing cash dividends requires high: The company must have sufficient cash on hand, and after paying dividends, it still needs to maintain normal liquidity operations. If the company’s cash is tight, paying too many cash dividends can cause liquidity issues.

Distributing stock dividends has a low threshold: As long as the distribution conditions are met, the company’s cash balance does not matter. This is especially attractive for companies that need to retain cash for business expansion.

Complete Process of Dividend Distribution

Most companies distribute dividends once a year (common in Taiwan’s stock market), while US stocks often pay quarterly. The distribution process involves four key dates:

1. Announcement Date: The company announces the specific details of the dividend plan.
2. Record Date: The list of shareholders eligible for dividends is finalized. As long as you hold shares before this date, you qualify for this period’s dividends.
3. Ex-Dividend Date: Usually the day after the record date. Buying shares on this date or later means you do not receive this dividend.
4. Distribution Date: The dividends are officially credited to shareholders’ accounts.

Important: Shares can still be traded on the ex-dividend date without affecting dividend entitlement.

Detailed Calculation Methods for Stock Splits and Dividends

Cash Dividend Calculation

Formula: Number of shares held × Cash dividend per share = Amount of cash receivable

Example: Company A pays 10 yuan per share. You hold 1,000 shares, so your receivable cash is: 1,000 × 10 = 10,000 yuan (pre-tax).

Stock Dividend Calculation

Formula: (Number of shares held ÷ Denominator of the distribution ratio) = Additional shares

Example: Company B issues 1 share for every 10 shares held. You hold 1,000 shares, so additional shares are: (1000 ÷ 10) × 1 = 100 shares, making your total shares 1,100.

Hybrid Method Calculation

When both types are distributed simultaneously, calculate separately and then sum. For example, issuing 1 stock for every 10 shares and paying 2 yuan cash per share:

• Additional shares: (1000 ÷ 10) = 100 shares
• Cash dividend: 1,000 × 2 = 2,000 yuan
• Total benefit: 100 shares + 2,000 yuan cash

How to Calculate the Stock Price After Ex-Dividend?

Dividends cause the stock price to drop, which is a normal technical adjustment.

Ex-Dividend Price (when paying cash)

Formula: Ex-dividend price = Closing price before dividend - Cash dividend per share

Example: Company A’s closing price before dividend is 66 yuan, paying 10 yuan, so the next day’s ex-dividend price is 66 - 10 = 56 yuan.

Ex-Rights Price (when issuing stock)

Formula: Ex-rights price = Closing price before dividend ÷ (1 + Stock issuance ratio)

Example: Company B’s closing price before dividend is 66 yuan, issuing 1 share for every 10 shares (ratio 0.1), so the next day’s ex-rights price is 66 ÷ 1.1 = 60 yuan.

Ex-Rights and Dividends Price (hybrid distribution)

Formula: Ex-rights and dividends price = (Closing price before dividend - Cash dividend per share) ÷ (1 + Stock issuance ratio)

Example: Company C’s closing price before dividend is 66 yuan, issuing 1 share for every 10 shares and paying 1 yuan cash, so the next day’s ex-rights and dividends price is (66 - 1) ÷ 1.1 = 59.1 yuan.

Fill-Right vs. Attach-Right: How Stock Price Trends Affect Your Returns

Dividends cause stock prices to fall, which is an objective phenomenon, but the subsequent trend determines whether you profit or lose:

Fill-Right / Fill-Dividend: After paying dividends, the stock price rebounds and may even surpass the pre-dividend level. In this case, investors gain not only the dividend but also stock appreciation, achieving “double benefits.”

Attach-Right / Attach-Dividend: After paying dividends, the stock price continues to decline, falling below the pre-dividend level. Although investors receive dividends, the stock’s depreciation exceeds the dividend value, resulting in a “loss.”

Conclusion: Dividends are only part of the return; the stock price trend is crucial for the final outcome. In the long run, good companies tend to experience a fill-right rally after dividends.

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

Advantages of Cash Dividends

✓ Immediate income credited, high liquidity ✓ Does not dilute shareholders’ ownership percentage ✓ Clear and straightforward, suitable for conservative investors

Disadvantages of Cash Dividends

✗ Subject to taxation ✗ Affects company’s cash flow and liquidity ✗ Difficult to sustain when cash is tight

Advantages of Stock Dividends

✓ Increases the number of shares, with obvious compounding effects ✓ Does not use company cash, maintains liquidity ✓ Low-cost financing method ✓ Long-term holding yields far exceed cash dividends

Disadvantages of Stock Dividends

✗ Not immediate, requires waiting for fill-right ✗ Increasing total share capital may dilute stock price ✗ Needs market recognition

The smartest choice

For short-term investors: Cash dividends are more practical since you may not wait for long-term fill-right.

For long-term investors: Stock dividends are the way to go. Good companies’ stock dividends can generate compound growth effects, far surpassing cash dividend returns. Historical data shows that holding dividend-paying stocks long-term often yields multiple times the return of cash dividends.

Ultimate advice: Choose companies with stable performance and continuous growth. Whether they pay cash or stock, as long as the company develops well, long-term holding will be profitable.

How to Check a Company’s Dividend Plan

Method 1: Company Official Website

Most listed companies publish dividend plans in the investor relations or news announcement sections. Some large companies even compile historical dividend records, making it easy for investors to review past dividend and stock split data.

Method 2: Stock Exchange

In Taiwan, you can check the Taiwan Stock Exchange official website for ex-rights and ex-dividend forecast tables and calculation results. These tables record comprehensive dividend data since 2003, including specific ratios and dates for stock splits and dividends.

Conclusion

Dividend distribution is an important way for companies to reward shareholders and an effective method for investors to build passive income. Understanding the calculation methods for stock splits and dividends, as well as the differences between the two distribution methods, can help you make smarter investment decisions. Remember: Good companies’ dividends are like timed bombs—if you hold long enough, the power of compounding will gradually manifest.