Must-know before stock selection: Stock dividends vs cash dividends, a quick guide to rights issues and dividend calculations

There are two ways to make money from stocks: one is waiting for the stock price to rise, and the other is collecting dividends. But many investors actually can’t tell the difference—should they prefer receiving stocks or cash? How do you calculate stock dividends and cash dividends? This article will help you understand everything in one go.

Dividend Distribution Is Actually Simple: Stocks or Cash

After a listed company turns a profit, deducting debts and losses, the remaining profit is returned to shareholders. How is this done? There are only two ways.

Method 1: Cash Dividends
Directly deposit the money into your account—this is called paying dividends. The company must have cash on hand, and after paying, it must ensure liquidity isn’t compromised. Not all companies can generously pay cash dividends.

Method 2: Stock Dividends
Instead of cash, give additional shares. Your number of shares increases, often called “bonus shares” in the industry. This method has a low threshold—if you meet the distribution criteria, it doesn’t matter whether the company has enough cash.

There’s also a third combined approach: paying both cash and stock dividends at once.

When to Distribute Dividends? You Need to Know the Process

Most listed companies pay dividends once a year, some pay semi-annually or quarterly. U.S. stocks usually pay quarterly, while Taiwanese stocks often distribute annual dividends. The timing depends on when the financial report is announced.

Four Key Dates for Dividend Distribution:

1. Announcement Date - The company announces the dividend payout. From this day, the market knows dividends are available.

2. Record Date - The “cut-off date.” Shareholders holding the stock on or before this date are eligible for the current dividend. Many miss out because they miss this window.

3. Ex-Dividend Date - Usually the trading day after the record date. Buying on or after this date means you won’t receive the current dividend. If you bought before this date, even if you sell on or after it, you still get the dividend.

4. Payment Date - The day the dividend is actually credited to your account—cash or stock arrives.

Practical Calculation of Stock and Cash Dividends: Three Scenarios

Investors care most about: How much will I actually get?

Scenario 1: Stock Dividends Only

Suppose you hold 1,000 shares of a company that decides to give 1 share for every 10 shares held.

Calculation:
Number of shares ÷ (1 / dividend ratio) = Number of stock dividends

1000 ÷ 10 = 100 shares

After distribution, your total shares become 1000 + 100 = 1100 shares.

Scenario 2: Cash Dividends Only

Same holding of 1,000 shares, with a cash dividend of 5 yuan per share.

Calculation:
Number of shares × dividend per share = Cash received

1000 × 5 = 5,000 yuan

But don’t celebrate too early—taxes apply. Assuming a 5% tax, the actual amount received is 5,000 × 0.95 = 4,750 yuan.

Tax rates depend on your holding period and country-specific rules, so check beforehand.

Scenario 3: Mixed Distribution

Holding 1,000 shares, the company pays both stock and cash dividends. For example, 1 stock for every 10 shares, plus 4 yuan cash per share.

You will receive:

• Stock dividends: 100 shares (1000 ÷ 10)
• Cash dividends: 1,000 × 4 = 4,000 yuan

After payout, your total shares are 1,100, and your cash account increases by 4,000 yuan (less after taxes).

Extended Calculation of Stock and Cash Dividends: How to Calculate Ex-Dividend Price

The most fascinating part of dividend distribution is that after paying dividends, the stock price drops. This isn’t a loss—just an accounting adjustment.

Ex-Dividend Price (for cash dividends):
Ex-dividend price = Closing price on record date – cash dividend per share

For example, if Company A’s record date closing price is 66 yuan, and the dividend per share is 10 yuan, the next day’s ex-dividend price = 66 – 10 = 56 yuan.

It looks like a 10 yuan loss, but your account has gained 10 yuan in cash, so total assets stay the same.

Ex-Rights Price (for stock dividends):
Ex-rights price = Closing price on record date ÷ (1 + dividend ratio)

If Company A’s closing price is 66 yuan, and it pays 1 share for every 10 shares (ratio 0.1), then the next day’s ex-rights price = 66 ÷ 1.1 ≈ 60 yuan.

The stock price drops, but your number of shares increases, keeping your total market value unchanged.

Ex-Rights and Ex-Dividend Price (for both):
Ex-rights and ex-dividend price = (Closing price on record date – cash dividend per share) ÷ (1 + dividend ratio)

This is the most complex but follows the same principle: the effects of cash and stock dividends are combined.

Stock Dividends vs Cash Dividends: Which Should Investors Choose?

Advantages of Cash Dividends:

• You get cash directly, with high flexibility—can invest in anything
• No issuance of new shares, so shareholder equity isn’t diluted
• Increases your cash flow immediately

Disadvantages of Cash Dividends:

• Subject to taxes, reducing the net amount received
• High payout demands can deplete company cash reserves
• Short-term growth may not be visible

Advantages of Stock Dividends:

• Tax-free (receiving stocks doesn’t trigger a tax event)
• If the company’s stock price appreciates later, gains can far exceed cash dividends
• Compound growth effect is significant—long-term gains

Disadvantages of Stock Dividends:

• You can only realize gains when the stock price rises, which involves risk
• If the company’s performance deteriorates, the value of the bonus shares may decline
• No immediate cash inflow

Investor’s Real Preference: Most prefer cash dividends because they are certain income. Stock dividends require betting on the company’s future performance. But if the company performs well, long-term returns from stock dividends often surpass cash.

How Stock Price Moves After Dividends: Fill-Back vs. Drop-Back

After dividends are paid, the stock price drops—this is just a technical adjustment. The key is what happens afterward.

Fill-Back (Filling the Gap):
The stock price recovers to pre-dividend levels, resulting in overall profit for investors.

Drop-Back (Persistent Drop):
The stock price continues to decline below pre-dividend levels, leading to losses.

This is crucial in determining whether investors truly profit. Dividends signal that the company is doing well and generating profits. Whether the market believes this signal influences future stock price movements.

If the stock price recovers after the dividend, you enjoy both dividend income and capital gains. If it drops, even receiving dividends can’t offset the loss. Choosing a good company is more important than the dividend payout method.

How to Find Dividend and Distribution Information

Method 1: Company Website
Public companies publish dividend announcements and historical payout records on their official sites.

Method 2: Stock Exchange Website
For example, in Taiwan, the Taiwan Stock Exchange’s market announcements include ex-dividend and ex-rights notices and calculation tables. Data from May 2003 onward is available.

All this information is public. Always review it carefully before investing to avoid missing important dates.

Final Words

Dividends are not the only way companies reward investors. Some choose share buybacks (buying back their own shares to reduce float and increase per-share value) or stock splits (dividing one share into multiple to attract retail investors and boost stock price).

The key is understanding the logic behind dividend calculations, the real impact on stock prices and investors, and aligning these with your investment style. Cash dividends suit investors seeking stable income, while stock dividends are better for those willing to wait for long-term growth.

Finally, remember: paying dividends is good, but don’t be blinded by them. Choosing the right company and timing your entry are the true secrets to profit.