Stock dividends vs cash dividends, a beginner's essential guide to dividend choices

The Truth About Shareholder Dividends: Stocks or Cash?

Buying shares of a listed company makes you a shareholder. When the company makes a profit, it naturally considers how to reward investors. But there are two ways to distribute dividends: one is giving you stocks, the other is giving you cash. These two methods seem attractive, but their underlying logic is completely different.

Cash dividends mean the company directly deposits money into your account, which you can use immediately. Stock dividends are when the company gives you additional shares; your number of shares increases, but the cash in your account remains unchanged.

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

Most retail investors prefer cash because the reason is simple—the money is theirs once received. Investors can freely decide what to do with the cash, whether to reinvest or use it for other purposes. Moreover, companies paying cash dividends do not issue new shares, so your ownership percentage isn’t diluted.

However, cash dividends have a drawback: taxes are involved, and the tax rate depends on how long you’ve held the shares. Those who sell early face higher tax rates, which effectively reduces their returns.

For companies, paying cash dividends is more challenging. They must have sufficient profits and cash on hand to distribute dividends. After paying, the company’s available funds decrease, and during liquidity shortages, it may even affect normal operations. This is why some cash-strapped companies, even when profitable, tend to distribute stock dividends.

In the long run, stock dividends are actually more valuable. If you choose a quality company, the continuous rise in stock price yields far more than cash dividends. Stock dividends are like compound interest from the company—your stock holdings increase, and the stock price also rises, providing dual benefits. This model is especially suitable for investors planning to hold long-term.

How to Calculate Stock Dividends and Cash Dividends? Let’s look at real examples

Suppose you hold 1,000 shares of a company.

Scenario 1: Stock Dividend The company decides to give 1 share for every 10 shares held, so you get (1000 ÷ 10) × 1 = 100 new shares. After the dividend, your account becomes 1,000 + 100 = 1,100 shares.

Scenario 2: Cash Dividend The company declares a cash dividend of 5 yuan per share, so you receive 1,000 × 5 = 5,000 yuan. But remember, taxes are deducted before you receive the money. Assuming a 5% tax rate, you actually get 5,000 × 0.95 = 4,750 yuan.

Scenario 3: Mixed Distribution Some companies distribute both stocks and cash. For example, they give 1 share for every 10 shares (100 shares) and also pay 4 yuan per share (total 4,000 yuan). Your final gains are 100 new shares plus 4,000 yuan in cash.

Want to quickly estimate the returns of different schemes? You can use cash dividend calculators—input your shareholding and dividend plan, and immediately see the actual net amount, saving you from mental math.

Will the stock price drop after dividends are distributed? Don’t worry, this is normal

Before dividends are paid, investors are often optimistic, and the stock price usually rises for a period after the dividend announcement. But once it hits the ex-dividend date, the stock price will typically experience a “gap” downward. What’s going on?

In the case of cash dividends (ex-dividend): After cash is paid out, the company’s net assets decrease, and the value per share drops accordingly. The calculation is simple: Ex-dividend price = Closing price on the record date − Cash dividend per share

For example, if Company A’s closing price is 66 yuan and it pays a 10 yuan dividend per share, the next day’s ex-dividend price will be 66 − 10 = 56 yuan.

In the case of stock dividends (ex-rights): After issuing new shares, the total share capital increases, but the company’s actual value remains unchanged. It’s like a cake that hasn’t grown bigger but has been sliced into more pieces, so each piece becomes smaller. The calculation is: Ex-rights price = Closing price on the record date ÷ (1 + Payout ratio)

For example, if Company A’s closing price is 66 yuan and it distributes 1 share for every 10 shares (payout ratio 0.1), the ex-rights price is 66 ÷ 1.1 = 60 yuan.

Mixed case (ex-rights and ex-dividends): If both cash and stock are distributed, combine the two formulas: Ex-rights and ex-dividends price = (Closing price on record date − Cash dividend per share) ÷ (1 + Payout ratio)

For example, closing price 66 yuan, cash dividend 1 yuan, stock dividend 0.1: (66 − 1) ÷ 1.1 = 59.1 yuan

The stock price drops may look uncomfortable, but this is just a paper fluctuation; your actual rights and interests are not eroded. The key is to watch the subsequent market trend: if the stock price recovers to the pre-dividend level, it’s called “filling the rights” or “filling the dividend”; if it continues to fall, it’s “discounting the rights” or “discounting the dividend”. Only when the price fills the rights and dividends can investors truly profit; if it discounts, they lose.

When are dividends paid? How to check dividend distribution information?

Dividends are usually paid after the financial report is released. In Taiwan, annual dividends are common; in the US, quarterly dividends are more typical. Different companies disclose financial reports at different times, so the specific dividend payout schedule varies.

How to check if a company will pay dividends?

Method 1: Check on the company’s official website Public companies publish dividend announcements, which investors can find directly in the investor relations or news center of the company’s official website. Some companies also compile historical dividend records for easy reference.

Method 2: Check on the stock exchange website Taking Taiwan as an example, visit the Taiwan Stock Exchange Official Website for market announcements, which include dedicated Ex-rights and Ex-dividend Previews and Calculation Results. These records go back to 2003, allowing you to look up the dividend history of any company.

Common Questions and Answers

Q: Is paying dividends mandatory for a company? A: No. Companies have the discretion to decide whether to pay dividends. Some companies, even if profitable every year, may choose not to pay dividends and instead reinvest profits to expand their business or invest in technology. A company that doesn’t pay dividends long-term isn’t necessarily bad; it may be reserving strength for future growth.

Q: Which is more valuable—stock price appreciation or dividends? A: In the long run, the appreciation of a quality company’s stock price yields far more than dividends. Stock dividends increase your holdings, and combined with stock price growth, create a dual compound effect. Cash dividends provide a stable, “cash-in-hand” income.

Q: How to quickly estimate returns using a cash dividend calculator? A: Most investment platforms and financial websites offer cash dividend calculator tools. Input your shareholding, dividend amount, and personal tax rate, and you’ll see the actual amount received, avoiding estimation errors.

Q: Will stock prices always rise after ex-dividend? A: Not necessarily. Ex-dividend adjustments are technical; subsequent stock movements depend on the company’s fundamentals and market sentiment. Filling the rights and dividends requires investors to be optimistic about the company’s prospects to buy in.