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Dividend and ex-dividend

1. The source of dividends

Dividends are the profits that shareholders receive regularly from listed companies at a certain ratio, and dividends are the remaining profits distributed to shareholders in proportion to their shareholding after the listed company distributes dividends.

Generally speaking, after the financial year is settled, a listed company will distribute part of its profits to shareholders as dividends based on the number of shares held by shareholders. Listed companies in China must publish their annual financial reports within 120 days of the end of the financial year, and the profit distribution plan must be announced in the annual report. Therefore, the dividend distribution is generally conducted in the second and third quarters.

When distributing dividends, the preferred shareholders first exercise the income distribution according to the prescribed dividend rate, and then ordinary shareholders receive dividends based on the remaining profits. The dividend rate is not necessarily fixed. After the dividend is distributed, if the listed company still has profits to be distributed, it can pay dividends to commonshareholders.


2. Distribution method

Distributing dividends in the form of bonus shares is keeping the cash that should be distributed to shareholders in the enterprise for development and reproduction. It is not much different from the temporary non-distribution of dividends by joint-stock companies. Stock dividends increase the number of shares held by shareholders, increase the company’s registered capital, and decrease the net asset value of the shares. But in fact, the total asset value of stocks held by shareholders has not changed.

Property dividends are dividends and bonuses distributed to shareholders by listed companies with assets other than cash. Cash dividends are dividends paid by listed companies to shareholders in currency. It is also the most common and most common form of dividends. For example, the amount of dividends per share is a cash dividend. Stock dividends are dividends distributed by listed companies to shareholders in the form of stocks, which are commonly referred to as bonus shares.

Since dividends and bonuses can only be distributed to shareholders after profits have been made, listed companies generally do so after the company's business year-end. In practice, some listed companies make two settlements in a year, one in the middle of the business year and the other at the end of the business year. Accordingly, two dividends are paid to shareholders to reward them in time to attract investors. However, an interim dividend is different from a year-end dividend in that it can only be paid within the margin of profit before the interim and only if no loss is expected at the end of the year.

According to the Company Law, the basic procedure for dividend distribution by a listed company is that the Board of Directors of the Company first determines the dividend distribution plan following the profit level and dividend policy of the Company. And then it submits the plan to the shareholders' meeting for approval before it becomes effective. Finally, the board of directors can declare the dividend distribution plan to the shareholders and pay the dividends in an agreed manner at an agreed location on the prescribed dividend payment date.


3. Ex-rights and ex-dividends

Although there are four forms of dividends and bonuses for listed companies, listed companies in the Shanghai and Shenzhen stock markets generally only distribute profits in the form of stock dividends and cash dividends, which are collectively known as bonus shares and cash payments. When a listed company distributes dividends to its shareholders, the shares will be ex-dividend; when a listed company distributes bonus shares to its shareholders, the shares will be ex-rights.

When a listed company declares its profits for the previous year available for distribution and intends to implement them, the stock is said to be a constituent stock, because holding the stock entitles you to a dividend. At this stage, the listed company usually declares a time called the "record date", which means that the shareholders holding the stock at the close of the market on that day are entitled to dividends.

In the previous paper trading of shares, in order to prove the right to dividends to the listed company, shareholders had to register on the shareholding registration date declared by the company, and only those shareholders whose names were recorded on the company's share register on that date were eligible to receive dividends distributed by the listed company. With the implementation of scripless stock trading, share registration is conducted automatically through the computerized trading system; shareholders do not need to go to the listed company or the registered company to register their shares.


4. The pros and cons of bonus shares

When it comes to dividends for listed companies, Chinese stock investors generally prefer bonus shares. In fact, for listed companies, there is no difference between giving bonus shares to shareholders and not giving any bonus at all or rolling over profits to the next year. All of these methods keep the profits that should be distributed to the shareholders in the enterprise as the capital for the next year's development and production. On the one hand, it enhances the operating strength of listed companies, further expanding the scale of production and operation of enterprises, on the other hand, it is not like the cash dividends that require a larger amount of cash to cope with the dividend work, because the enterprise generally keeps the cash is not much. Therefore, these forms are more favorable for listed companies.

When a listed company does not pay dividends to its shareholders or rolls over profits to the next year, the profits are recorded in the balance sheet in the form of a capital reserve fund. When bonus shares are given to the shareholders, this part of the profit will be recorded as additional share capital and become part of the shareholders' equity. However, if the share capital of the listed company changes, the listed company has to re-register with the local business administration organization and publish the announcement of the change of share capital in addition to the bonus shares. However, no matter which of the above methods is used to deal with the profits of the previous year, the total net assets of the listed company will not undergo any change, nor will there be any form of change in the operating strength in the coming years.

For the shareholders, the distribution of profits in the form of bonus shares will be better than no profit distribution. All these methods do not change the shareholders' shareholding ratio and do not increase or decrease the monetary value of the shares, because bonus shares split the shares into smaller shares and reduce the net asset value of each share in the same proportion, but they directly increase the economic efficiency of the shareholders. It is based on the following.

4.1 According to the current regulations in Taiwan, the taxation of stock dividends can be deducted based on the savings rate for the same period, i.e., certain concessions are granted, and the specific tax amount is 20% stock income tax per share minus the savings rate for the same period.

Income tax = (dividends per share - current year fixed savings rate) x 20%

When a listed company does not distribute profits in the current year or rolls over profits to the next year, the amount of dividends will inevitably increase in the next year and the shareholders will have one less opportunity to enjoy tax relief.

4.2 During the period when the supply of shares exceeds the demand, bonus shares increase the number of shares available to shareholders, which will help to increase the share price due to market speculation, and thus help to increase the shareholders' income from the spread.

4.3 Bonus shares increase the number of shares and lower the price of the shares due to ex-rights, which lowers the threshold for buying the shares.

Comparing a bonus to a cash payout, both are rewards to shareholders of a listed company, just in different ways. As long as the listed company makes a profit in a certain year, it is a reward to its shareholders.

However, bonus shares and cash bonuses are different. If you compare them with bank deposits, a cash bonus is similar to capital deposit and interest withdrawal, i.e. depositors will withdraw interest once a year after depositing their money in the bank. The bank will convert the interest due to the depositor into the principal every certain period so that the interest can be renewed and paid in full at the end of the period. However, there is an uncertainty in this type of return, because converting profits into equity and putting it into renewable assets is a form of reinvestment, which also faces risks. If the company's operation is relatively stable in the coming years, the business development is relatively smooth, and the return on net assets is above average, then the shareholders can get the expected return; if the listed company's return on net assets is below average or the listed company has poor management after the bonus, the shareholders will not only not get the expected return in the coming years, but will also turn the previous year's bonus into fixed assets precipitation.

In this way, bonus shares are not as good as cash dividends, as shareholders can choose to invest in other stocks or investment vehicles with higher profit margins after receiving the cash.