What are Stock Dividends? How to Calculate Stock Dividends? Understanding how to make money with stocks is a common goal for many beginner investors. One key way to earn returns is through dividends.

Today, Caven Investment Growth will explain what stock dividends are, how to calculate them, the differences between stock dividends and cash dividends, and answer some common questions.

To fully grasp dividend-related information, it's also essential to understand ex-dividend and ex-rights calculations.

 

What is Stock Dividend?

Why Do Most Investors Pay Attention to Stock and Cash Dividends? Many investors place significant importance on stock and cash dividends when selecting investments.

This focus stems from the fact that companies distribute their earnings to shareholders in the form of "stock dividends" or "cash dividends" during ex-dividend and ex-rights periods.

Therefore, when choosing stocks to invest in, investors often consider the company’s history of dividend payments as a key factor in their decision-making process.

Stock dividends, also known as "ex-rights," involve a company distributing additional shares of stock to its shareholders instead of cash.

This process indicates that the company is retaining cash to reinvest in its growth, such as by purchasing equipment, expanding facilities, or funding other growth initiatives. By issuing stock dividends, the company ensures that shareholders still receive a benefit while the company retains the necessary cash to fuel its continued growth.

Further Reading: What is Dividend Yield? Understand Calculation and Key Considerations in 3 Minutes!

What is Cash Dividend?

Cash dividends, also known as "ex-dividend," involve a company distributing a portion of its profits directly to shareholders in the form of cash.

This type of dividend is typically issued by companies that are in a mature phase or have limited investment needs. Cash dividends provide immediate income to shareholders, enhancing their cash flow and enabling them to manage their finances more effectively.

How to Calculate Stock Dividends

Assuming Company A issues a stock dividend of 1.5 shares per share, and an investor holds one lot of stock (1,000 shares), the number of additional shares received as stock dividends can be calculated as follows:
Stock Dividend = 1.5 * 1,000 * 0.1 = 150 shares

For more information, refer to the article on dividend yield:

Further Reading: What is Dividend Yield? Understand Calculation and Key Considerations in 3 Minutes!

How to Calculate Cash Dividends

Assuming Company A issues a stock dividend of 1.2 NT dollars per share, and an investor holds one lot of stock (1,000 shares), the amount of stock dividend received can be calculated as follows:
Cash Dividend = 1.2 * 1,000 = 1,200 NT dollars

For more essential information on stock investing, refer to the beginner's guide articles:

Further Reading: Stock Investment Basics | Beginner's Guide "From Zero to One" | How to Buy Stocks - Expert Tips

What is Dividend Payout Ratio?

Dividend Payout Ratio, also known as the Stock Dividend Ratio or Dividend Distribution Ratio, refers to the proportion of a company's annual profits allocated to dividend payments.

Due to the varying cash needs at different growth stages of a company (for instance, companies in the growth phase require a significant amount of cash to expand their scale, whereas mature companies do not need as much capital for investments), the use of profits will differ accordingly.

If investors want to understand how a company utilizes its earnings, they can review the company's past "dividend payout ratio" and "earnings" to grasp the dividend distribution situation.

This information can help investors decide whether to invest in that company.

Sources of Dividends?

Generally, there are three main sources from which companies draw to distribute dividends: retained earnings, legal reserve, and capital reserve.

1. Retained Earnings

Retained earnings refer to the company’s current profits or the accumulated profits from previous years that have not been distributed. This is the primary source for dividend distribution.

2. Legal Reserve

Each year, the company allocates 10% of its profits to the legal reserve. When the company is not incurring losses, the legal reserve can be distributed as dividends to shareholders based on their shareholding ratio.

3. Capital Reserve

When the company is not incurring losses, it can use the capital reserve to distribute dividends. This reserve comes from the amount investors pay that exceeds the par value of the stock.

Differences Between Stock Dividends and Cash Dividends

Understanding how to calculate stock and cash dividends is crucial, but many people might still be confused about the differences between the two. Here, Caven has summarized the key differences in a table for easy reference:

Stock Dividends vs. Cash Dividends

 

Common Questions About Stock and Cash Dividends

Q1. Which is Better: Stock Dividends or Cash Dividends?？

Choosing between stock dividends and cash dividends depends on your investment goals. If you want to invest in a company that is likely to grow and generate future profits, stock dividends may be the better choice. On the other hand, if you need a steady cash flow, cash dividends might be more suitable.

Caven's Tip: If you choose cash dividends, be aware of potential tax liabilities and additional health insurance premiums that may apply.

Q2. How Often Are Stock and Cash Dividends Paid?

Most companies distribute dividends once a year. However, if you are investing in ETFs, they may distribute dividends quarterly or semi-annually. Therefore, it is advisable to check the dividend frequency of the company or investment before investing.

Q3. How Do You Receive Dividends?

In Taiwan, most companies distribute stock and cash dividends between July and September. To receive dividends, you need to purchase the company’s stock before the "ex-dividend date" and hold it until the "record date." On the dividend distribution date, you will receive your stock or cash dividends.

Further Reading: Ex-Dividend and Ex-Rights Calculation Guide: Methods and Advantages & Disadvantages

Q4. How Are Stock Dividends Calculated?

The formula for calculating stock dividends is: Dividend Amount per Share * Number of Shares Owned * 0.1.

Q5. How Are Cash Dividends Calculated?

The formula for calculating cash dividends is: Dividend Amount per Share * Number of Shares Owned.

Further Reading: How to Make Money with Stocks? 3 Must-See Tips for Profiting from Stocks!

Conclusion

Understanding stock dividends and cash dividends, as well as how to calculate them, provides valuable insights into how to make money through stocks. In addition to profiting from price differences, investors can also enhance their asset value or maintain a steady cash flow by receiving dividends.

If you want to learn more about stock investment basics, feel free to contact us for a consultation. We can help you establish a strategic direction in the stock market.

However, if you plan to buy stocks before the ex-dividend date to receive stock or cash dividends, pay close attention to the company's ability to fill the dividend gap. This precaution can help you avoid potential losses.