We previously mentioned in our article A must-read for stock market beginners! What are stocks? What are the benefits of investing in stocks? that one of the advantages of investing in stocks is earning dividends to generate cash flow. In this article, we’ll explain what dividends are, the different types of dividends, and how to compare them.

What Are Dividends?

Dividends are a form of compensation a company pays to its shareholders from its profits, usually distributed in the form of cash or stock.

In general, companies that consistently pay dividends are usually seen as more financially stable and reflect a certain level of company health.

There are two common types of dividends: cash dividends and stock dividends.

Cash Dividend:

The Company Distributes Cash to Shareholders

For example, "Company A distributes a cash dividend of NT$10" means that for every share you own, the company will pay you NT$10. If you own one lot (1,000 shares), your total cash dividend would be 1,000 × NT$10 = NT$10,000.

Converting to Dividend Yield for Comparison

The amount of cash dividends distributed by a company shouldn’t be compared solely based on the dividend amount itself, since the market price of each stock differs. The relative return on investment differs as well. We calculate the "cash dividend / market price" to determine the cash dividend yield, which provides a more meaningful basis for comparison.

For instance, assuming both Company A and Company B announce a cash dividend of NT$10. However, Company A’s stock price is NT$50, while Company B’s stock price is NT$100. We can easily calculate the cash dividend yield for both companies:

Company A: 10 / 50 = 20%; Company B: 10 / 100 = 10%.

In this case, although both companies distribute the same amount of cash dividends, Company A offers a higher yield at 20%, making it potentially more attractive to income-focused investors.

It’s easy to see that since Company A’s stock price is only half that of Company B, Company A’s cash dividend yield is double that of Company B. In other words, investing in Company A offers better returns in terms of cash dividend income compared to investing in Company B.

Stock Dividend:

The Company Distributes Stock to Shareholders

• Stock Dividends: (Announced Dividend Amount × 0.1) × Number of Shares Held = Number of Shares Distributed
• In Taiwan, the par value of a stock is NT$10 per share. Therefore, a stock dividend of NT$1 means that for every 1 share, 0.1 additional shares are distributed.

For example: "Company A distributes a stock dividend of NT$1." If an investor originally holds one lot (1,000 shares), they would receive (1 × 0.1) × 1,000 = 100 shares. The total number of shares held would increase from 1,000 to 1,100 shares.

Calculation of Dividend Yield:

• Cash Dividend Yield = Cash Dividend / Stock Price
• Stock Dividend Yield = Stock Dividend / Stock Price
• Overall Dividend Yield = Cash Dividend Yield + Stock Dividend Yield = (Cash Dividend + Stock Dividend) / Stock Price

The calculation of stock dividend yield is the same as that of cash dividend yield, where the stock dividend amount is divided by the market price. Therefore, when calculating the overall dividend yield, you need to add the stock dividend and cash dividend together and then divide by the market price to get the final dividend yield.

After reading this article, you should have a deeper understanding of dividends and how to compare different dividend yield.