Cash dividends vs stock dividends: How should investors choose?

Investors who purchase stocks of listed companies are typically rewarded with dividends when the company is highly profitable. There are two main methods of dividend distribution: stock dividends (bonus shares) and cash dividends (payouts). While both seem to increase investor returns, they are fundamentally different.

For investors, cash dividends are more popular because they provide tangible cash that can be freely allocated to other investments and do not dilute shareholder equity. However, cash dividends are taxable, with the tax rate linked to the holding period.

From a company’s perspective, cash dividends require higher thresholds—sufficient profits and cash reserves are needed. Paying dividends can impact liquidity and may constrain new project development. In contrast, stock dividends are more flexible, requiring only that certain distribution conditions are met, and exert less pressure on the company’s cash flow.

Long-term investors should pay more attention to the compound growth effect of stock dividends. If the company develops steadily, the gains from stock price appreciation often far surpass cash dividends, as stock dividends provide a long-term growth mechanism.

What exactly are stock dividends?

Dividend distribution is the act of a company returning remaining profits to shareholders after paying off debts and covering losses. Based on the shareholder’s proportion of ownership or company bylaws, each shareholder receives a different dividend amount.

There are two ways to distribute dividends:

One is the issuance of new shares at no cost—the listed company directly issues shares to shareholders, credited to their existing accounts, increasing their shareholding. This is called stock dividends or bonus shares.

The other is cash payout—profits are transferred directly into investors’ cash accounts, also known as cash dividends or payouts.

The choice of method depends on the company’s financial situation. Cash dividends require verification of two conditions: the company has sufficient earnings and cash on hand, and the payout does not harm daily operational liquidity. Stock dividends have relatively looser requirements.

The schedule and process of stock dividend distribution

Taiwanese listed companies mostly distribute dividends annually, whereas U.S. stocks tend to pay quarterly. Dividend plans must be approved by the shareholders’ meeting and disclosed in financial reports. The specific payout timing depends on the company’s financial report disclosure schedule—if the annual report is disclosed in February, shareholders may receive dividends in April; if disclosed in April, then in June.

Not all profitable companies pay dividends every year. If a company has major projects or needs capital expansion, it may delay dividends even if it has profits. Only a few companies can maintain stable dividend payments.

Four key steps in dividend distribution:

Announcement date — the company publicly announces dividend information

Shareholder record date — the date to determine the list of shareholders eligible for dividends; those holding shares on or before this date qualify

Ex-dividend and ex-rights date — usually the first trading day after the shareholder record date; stocks bought on this day or later do not receive this period’s dividends; selling on the ex-dividend date does not affect dividend entitlement

Payout date — the date when dividends are officially paid to shareholders

How to calculate stock dividends? Practical guide to stock dividend calculations

Before deciding on dividends, the company estimates the total payout based on the distribution ratio and then formulates a specific plan. Here are examples illustrating three dividend modes:

Pure stock dividend method:

Suppose an investor holds 1,000 shares, and the company decides to issue 1 new share for every 10 shares held.

Number of new shares = (1000 ÷ 10) × 1 = 100 shares

Post-distribution, the investor’s total shares = 1000 + 100 = 1100 shares

Pure cash dividend method:

Suppose an investor holds 1,000 shares, and the dividend is 5.2 yuan per share.

Cash received = 1000 × 5.2 = 5200 yuan

After deducting 5% tax, actual credited amount = 5200 × 0.95 = 4940 yuan

Mixed dividend method:

Suppose the company issues 1 stock for every 10 shares and also pays 1 yuan cash per share.

Stock dividend = (1000 ÷ 10) = 100 shares

Cash dividend = 1000 × 1 = 1000 yuan

Final total = 100 shares + 1000 yuan cash

How does stock price adjust after ex-dividend and ex-rights?

Definition and calculation of ex-dividend

When cash dividends are paid, the company’s net assets decrease by the amount paid out, and the asset value per share declines accordingly, leading to a drop in stock price. This process is called ex-dividend.

Ex-dividend price formula: Ex-dividend price = Closing price on the record date − Cash dividend per share

Example: Company A’s record date closing price is 66 yuan, with a dividend of 10 yuan per share, so the next day’s ex-dividend price = 66 − 10 = 56 yuan

Definition and calculation of ex-rights

When stock dividends are issued, the total share capital increases, but the total market value remains unchanged. The value per share is diluted, causing the stock price to fall. This process is called ex-rights.

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

Example: Company A’s record date closing price is 66 yuan, with a 1-for-10 stock issuance (issuance ratio 0.1), so the next day’s ex-rights price = 66 ÷ 1.1 = 60 yuan

Mixed dividend ex-dividend and ex-rights calculation

Ex-rights and ex-dividend price = (Closing price on record date − Cash dividend per share) ÷ (1 + stock issuance ratio)

Example: Company A’s record date closing price is 66 yuan, with a 1-for-10 stock issuance and a 1 yuan cash dividend, issuance ratio 0.1, cash dividend 1 yuan

Ex-rights and ex-dividend price = (66 − 1) ÷ 1.1 = 59.09 yuan

Adjustment for rights issues and dividends

To adjust for the discontinuity caused by ex-dividend and ex-rights, the prices are adjusted through pre-adjustment and post-adjustment:

Pre-adjustment — Adjusts historical prices before the ex-dividend/ex-rights date to the current price level, ensuring continuous charting

Post-adjustment — Adjusts recent prices back to previous levels, moving recent candlesticks upward

No adjustment — Keeps original price data unchanged

How do stock prices move after dividends? How do investors profit?

Short-term impact of dividends on stock price

After a company announces a dividend, the stock price typically drops on the ex-dividend date due to technical reasons. This is a mathematical inevitability—cash decreases or share capital increases, reducing the asset value per share. But this does not mean investors lose money, because they simultaneously receive equivalent cash or new shares.

Market signaling effect of dividends

Dividends convey positive signals: the company is profitable, well-managed, and confident about the future. This signal often boosts market sentiment, attracting new investors and pushing the stock price higher. After the ex-dividend date, the stock becomes cheaper, encouraging optimistic investors to buy at lower prices.

Filling and discounting of rights

If the stock price eventually recovers to the pre-ex-dividend level, it is called filling the rights or filling the dividend; if it continues to decline, it is called discounting the rights or discounting the dividend.

Actual profit sources for investors

The wealth increase from dividends is delayed—it is not immediate. The real profit for investors comes from:

1. The dividend itself (cash or new shares)
2. The appreciation of stock price after the ex-dividend date, which may recover or even rise

This is why long-term investors in a bull market value stock dividends more—if the company continues to grow after issuing additional shares, the compound effect can significantly enhance investment returns.

How to check a company’s dividend information?

Method 1: Official company channels

When listed companies announce dividends, they disclose detailed information on their official websites. Some companies also compile historical dividend records for investors to review, making it easier to track changes in dividend policies.

Method 2: Stock exchange

For example, in Taiwan, investors can log into the Taiwan Stock Exchange official website, access the market announcement section, and check the ex-dividend and ex-rights forecast tables and calculation results. These tables include complete dividend data from May 5, 2003, to the present. Investors can retrieve historical dividend records of any company to understand its dividend stability and trends.

Additionally, companies that do not pay dividends may offer other ways to reward shareholders—stock splits to make shares more affordable, or share buybacks to increase per-share assets—these are alternative shareholder return mechanisms.