Cash or stocks? Understand how stock dividends are calculated in one go, and how investors should choose

When you hold shares of a listed company and become a shareholder, the company will decide how to reward investors when it makes profits. Some companies distribute cash dividends, some distribute stock dividends, and some do both. At first glance, these all seem like good things, but investors must understand: how to calculate stock dividends and which method is truly more beneficial for themselves.

Two Ways of Dividend Distribution: Cash or Stock

Simply put, companies have two main ways to distribute profits:

First: Cash Dividends
Directly distribute profits as cash into your account, called cash dividends or dividend payout. For example, if the company decides to pay 1 yuan per share, and you hold 1000 shares, you will receive 1000 yuan, but taxes apply.

Second: Stock Dividends
Instead of cash, the company issues additional shares to shareholders, known as stock dividends or bonus shares. For example, if the company decides to give 1 share for every 10 shares held, your 1000 shares will become 1100 shares. It sounds like the number of shares increases, but in reality, the value per share is diluted.

How does the company usually choose? It depends on its cash situation. Paying cash dividends requires stricter conditions — sufficient profits and cash on hand, and liquidity must remain adequate afterward. Distributing stock dividends is more relaxed — even if cash is tight, they can still distribute, because it’s essentially promising future profits to shareholders in advance.

How to Calculate Stock Dividends? Practical Examples

Suppose Company A decides to distribute dividends in different ways:

Pure Stock Dividend
Announcement: 1 stock for every 10 shares
Your holdings: 1000 shares
Calculation: 1000 ÷ 10 × 1 = 100 shares of stock dividend
After distribution: 1000 + 100 = 1100 shares

Pure Cash Dividend
Announcement: 5 yuan cash per share
Your holdings: 1000 shares
Calculation: 1000 × 5 = 5000 yuan cash dividend
After tax (assumed 5%): 5000 × 0.95 = 4750 yuan credited

Mixed Dividend
Announcement: 1 bonus share for every 10 shares plus 2 yuan cash per share
Your holdings: 1000 shares
Result: 100 bonus shares + 2000 yuan cash

Understanding the ex-dividend and ex-rights price calculation is also important:

Suppose the closing price before dividend is 60 yuan, and the company issues 1 share for every 10 shares (payout ratio 0.1). The ex-dividend price after distribution is: 60 ÷ (1 + 0.1) = 54.5 yuan. If simultaneously paying 2 yuan cash, the ex-dividend and ex-rights price becomes: (60 - 2) ÷ (1 + 0.1) = 52.7 yuan.

This explains why stock prices often drop after dividends — it’s a normal adjustment, not necessarily indicating a loss.

Cash Dividends vs Stock Dividends, Which Is More Valuable?

Investors generally prefer cash dividends for straightforward reasons:

• Immediate cash in hand, ready to use
• No dilution of ownership, shareholding percentage remains the same
• Greater flexibility to buy what they want

But cash dividends also have costs:

• Taxes, with shorter holding periods incurring higher rates
• Dividend payouts reduce company liquidity, potentially limiting expansion
• For companies with cash shortages, excessive dividends can lead to liquidity crises

Stock dividends may seem like a loss, but have deeper implications:

• For high-quality companies with cash flow issues, this is the most practical choice
• In the long run, if the company develops well, stock appreciation yields greater returns than cash dividends
• It also avoids immediate tax burdens

In other words: if you need cash urgently, choose cash dividends; if you believe in the company’s long-term growth, opt for stock dividends.

How Does the Stock Price Move After Dividends? Fill or Drop

This is a common point of confusion. The stock price dropping on the dividend day is a normal ex-dividend process, but often the stock rebounds afterward.

If the stock price recovers to the pre-dividend level, it’s called filling the gap or filling the dividend; the investor’s wealth increases accordingly. Conversely, if the price continues to decline, called sticking the gap or sticking the dividend, it results in a loss.

Whether the gap is filled successfully depends on the company’s fundamentals — paying dividends signals good performance, attracting investors and pushing the stock price higher. But if the company’s subsequent performance is poor, the stock price may not recover.

How to Check a Company’s Dividend Plan

Check the company’s official website for announcements; most listed companies publish historical dividend records and future plans.

Use the stock exchange’s information — for example, in Taiwan, the Taiwan Stock Exchange website provides comprehensive ex-dividend and ex-rights notices, calculation results, and even historical dividend data.

Once you understand how to calculate stock dividends, you can evaluate a stock’s investment value more rationally — not just by dividend amount, but also by considering the company’s development prospects and your own capital needs.