The Difference Between Stock Dividends and Cash Dividends: Understanding Payout Methods and Investment Impact

Two Models of Dividend Distribution: Cash or Stock?

Listed companies typically return a portion of their profits to shareholders after earning money, which is the concept of dividend payout. However, there are two fundamentally different methods of distribution:

One is to pay directly in cash, called cash dividends or dividends, which will be credited directly to investors’ cash accounts. The other is to issue stock, known as stock dividends or bonus shares, where the number of shares held by investors increases, and these new shares are directly deposited into their existing share accounts.

The company’s choice of method depends on its financial situation. Paying cash requires the company to have sufficient cash on hand and not to affect daily operational liquidity, which is a higher threshold. Paying stock is much simpler—if the company meets the distribution criteria, it can proceed regardless of cash reserves.

When Are Dividends Paid? The Complete Distribution Process

Dividends are usually officially distributed after the company releases its financial report. Taiwan stocks typically distribute dividends annually, while US stocks often pay quarterly, with specific timing varying by company.

Before distribution, several important dates occur:

Announcement Date: When the company announces the distribution plan to the market. Record Date is the key—holding the stock before this date entitles you to participate in the current dividend payout. Ex-dividend date is usually the trading day after the record date; stocks purchased on this day will not receive this period’s dividends. Finally, on the Distribution Date, dividends are officially credited.

It is important to note that not all profitable companies pay dividends regularly. Some companies, even if profitable, prefer to reinvest funds into business expansion or new projects and do not pay dividends every year.

How to Calculate Stock Dividends? An Actual Example

Suppose an investor holds 1000 shares of a company, and the company decides to distribute stock dividends at a ratio of 1 share for every 10 shares held:

• Shares received = (1000/10) × 1 = 100 shares
• Total shares after distribution = 1000 + 100 = 1100 shares

If the company opts for cash dividends at 5 yuan per share:

• Cash received = 1000 × 5 = 5000 yuan
• After deducting 5% tax, the actual credited amount = 5000 × 0.95 = 4750 yuan

Using a mixed mode—distributing 1 stock for every 10 shares plus 2 yuan cash per share:

• Stock portion = (1000/10) × 1 = 100 shares
• Cash portion = 1000 × 2 = 2000 yuan
• Final total = 100 shares + 2000 yuan cash

What Does the Ex-dividend and Ex-rights Price Mean for Stock Price?

After dividend distribution, the stock price of the listed company will drop significantly, due to two mechanisms at play.

Ex-dividend occurs when cash dividends are paid— the company’s total net assets decrease, and the value per share naturally declines, leading to a downward adjustment of the stock price. The calculation is: Ex-dividend price = Closing price on record date - cash dividend per share.

Ex-rights happens when stock dividends are issued—additional shares increase the company’s total share capital, but market value remains unchanged, so the value per share is diluted, and the stock price also drops. The formula is: Ex-rights price = Closing price on record date ÷ (1 + rights issue ratio).

For example, if the closing price on the record date is 66 yuan, and a cash dividend of 10 yuan per share is paid, the next day’s ex-dividend price would be 66 - 10 = 56 yuan; if instead, 1 share is issued for every 10 shares (rights issue ratio 0.1), the ex-rights price would be 66 ÷ 1.1 ≈ 60 yuan.

This price gap may seem like a loss, but in reality, investors’ rights are not eroded— the increase in shares or cash offsets the decline in stock price.

Fill-Back and Discount: Where Do Stock Prices Go After Dividends?

After ex-rights and ex-dividend, stock prices become cheaper. If investors are optimistic about the company’s prospects, they will buy at lower prices, pushing the stock price back up. When the price recovers to the pre-dividend level, it is called fill-back or fill dividend. Conversely, if the stock price continues to fall, it is called discount or discounted dividend.

During fill-back periods, investors can benefit from both the dividend payout and the stock price appreciation. However, whether the price can recover depends ultimately on the company’s long-term development prospects and market sentiment.

Stock Dividends vs Cash Dividends: Which Is More Desirable?

From an investor’s perspective: Most prefer cash dividends because receiving cash allows more flexible fund allocation and does not dilute their ownership percentage. However, cash dividends are taxable, with rates depending on the holding period.

From a company’s perspective: Paying cash consumes the company’s cash flow and may limit operational flexibility. Especially for companies with tight cash flow, excessive dividends can cause liquidity issues. In contrast, issuing stock exerts less pressure on cash reserves.

Long-term view: If a company maintains good growth momentum, the gains from stock appreciation often surpass dividend income. Stock dividends increase the number of shares held, providing compound growth benefits for long-term investors, especially those with patience who continue to add positions. Cash dividends, while “realized,” are more susceptible to high taxes.

How to Check a Company’s Dividend Plan?

Through the company’s official website: When companies announce dividends, they usually publish the details on their website. Some listed companies also compile historical dividend records for investors.

Through the stock exchange: For example, in Taiwan, you can find ex-rights and ex-dividend forecast tables and calculation result tables on the Taiwan Stock Exchange official website, containing dividend details for all listed companies since 2003.

The Issue of Re-Adjustment After Ex-rights and Ex-dividend

The stock price experiences a technical gap on the ex-rights and ex-dividend date. To better observe the actual price movement, re-adjustment methods are used. Pre-restructuring adjusts the price backward to the current level before the dividend; post-restructuring adjusts the price forward to past levels. Choosing the appropriate re-adjustment method based on analysis needs makes the trend chart more meaningful.