Dividend, ex-rights and ex-dividend
What is dividend?
Dividends are profits distributed to shareholders by a listed company according to a certain ratio, while bonuses are the remaining profits distributed to shareholders based on their shareholding proportions after the distribution of dividends. As an investor and shareholder, obtaining dividends and bonuses is one of the fundamental purposes of investing in a listed company and one of its basic economic rights.
Generally, after the end of the financial year, listed companies will allocate a portion of their profits to shareholders as dividends based on the number of shares held by shareholders. According to relevant regulations in our country, listed companies must disclose their annual financial reports within 120 days after the end of the financial year and announce the profit distribution plan in the annual report. Therefore, the distribution of dividends by listed companies usually occurs in the second and third quarters of the following year.
When distributing dividends, preferred shareholders first exercise profit distribution according to the specified dividend rate, and then ordinary shareholders receive dividends based on the remaining profits. The dividend rate for ordinary shareholders is not fixed but is determined based on the profitability of the listed company. If the listed company has remaining profits available for distribution, dividends can be paid to ordinary shareholders accordingly.
What are the distribution methods?
There are several common forms of distributing dividends. Firstly, dividends can be distributed in the form of bonus shares, meaning that the company retains the cash that should be distributed to shareholders for corporate development and reproduction. Secondly, property dividends involve distributing dividends and bonuses to shareholders using other assets held by the company. Another method is debt dividends, where a liability is established and bonds or promissory notes are used to distribute dividends to shareholders. The most common method is cash dividends, which are dividends paid to shareholders in monetary form. Additionally, there are stock dividends, which are dividends distributed to shareholders in the form of stocks, also known as bonus shares.
In China's Shanghai and Shenzhen stock markets, dividend payments are assisted by the stock exchange and registration companies. During dividend distribution, the registration company will directly log the distributed bonus shares into the stock accounts of shareholders and transfer cash dividends to the capital accounts of shareholders through the securities firms where shareholders have accounts. Investors need to complete relevant procedures at securities firms within the specified period, sell the dividend rights as cash dividends, and have the dividend amount transferred to their capital accounts by the securities firms. If procedures are not completed within the specified period, securities firms need to be entrusted to handle relevant procedures at the stock exchange.
What are ex-rights and ex-dividends?
When a listed company distributes dividends to shareholders, it typically takes two forms: bonus shares and cash dividends. In this process, the concepts of ex-rights and ex-dividend come into play. Ex-rights refers to the adjustment of stock rights when a listed company issues bonus shares to shareholders, while ex-dividend involves adjusting stock rights when a listed company distributes cash dividends to shareholders.
When a listed company announces that it has profits available for distribution and prepares to implement this, the stock is referred to as inclusive of rights, and shareholders holding such stocks are entitled to enjoy dividends. At this stage, the listed company usually announces a record date, and shareholders holding stocks on that date have the right to receive dividends.
In the past, shareholders needed to register on the record date announced by the company to prove their entitlement to dividends. With the electronicization of stock trading, share registration is now automatically processed through computer trading systems, and shareholders do not need to register separately. As long as they hold the stocks at the close of the record date, they automatically have the right to receive dividends.
What is Ex-dividend?
When a listed company announces a stock dividend, it usually attracts the attention of investors. Ex-dividend refers to the process of adjusting the stock price downwards after the company distributes cash dividends to shareholders. This means that after the ex-dividend date, the company's stock price typically falls, reflecting that the value of the shares held by shareholders before the ex-dividend has decreased by an amount equivalent to the dividend. Although the drop in stock price may confuse investors, it is important to understand that ex-dividend does not affect the total market value of the company or shareholders' equity. Instead, it is a way for the company to redistribute profits by rewarding shareholders for their investment through the distribution of cash dividends. For investors, ex-dividend can be an opportunity for profit, especially for those seeking stable income, as they can enjoy dividends by holding stocks before the ex-dividend date and reinvesting or profiting from the stock price adjustment afterwards. Therefore, understanding the meaning and impact of ex-dividend is crucial for investors, as it helps them better plan their investment strategies and anticipate returns.
What is Ex-rights (XR)?
When a listed company announces the distribution of stock dividends to shareholders, converting the company's earnings into additional capital, or issues new shares, the stock price needs to be adjusted. This process is called ex-rights (XR), an abbreviation for EXCLUDE (remove) RIGHTS.
Another related term is XD (ex-dividend), indicating that when a company distributes dividends to shareholders in cash, the stock price will undergo an ex-dividend adjustment. XD stands for EXCLUDE (remove) DIVIDEND.
During the ex-rights process, the company typically determines an ex-rights date (DR), which is the specific date for stock dividend or rights issue adjustments. Shareholders holding stocks before this date will enjoy the corresponding rights, such as dividends or rights issues. Therefore, the ex-rights date is crucial for shareholders, as they need to ensure they hold the stock before this date to enjoy the related benefits.
Before announcing dividends or rights issues, stocks are referred to as inclusive rights stocks. Inclusive rights stocks mean that shareholders have not yet received the corresponding dividends or rights issues, so during this period, the stock price may be affected by market expectations.
The implementation of ex-rights requires related procedures and reports, usually requiring reporting to regulatory authorities and obtaining approval. Once approved, the company will determine the record date and ex-rights date. Shareholders holding stocks before the record date will enjoy the relevant rights, while the ex-rights date is used as a reference date for determining stock price adjustments.
Pros and Cons of Bonus Shares
Bonus shares are a method of dividend distribution by listed companies, which has both advantages and disadvantages for both the company and shareholders.
Pros:
Bonus shares increase the number of shares held by shareholders, which can contribute to stock price appreciation and increase shareholders' price differential income.
Bonus shares lower the threshold for buying stocks and increase the liquidity of stocks.
In times of high demand for stocks, bonus shares can change the supply-demand relationship of stocks and help boost stock prices.
Cons:
Bonus shares convert profits into capital for reinvestment, which carries some uncertainty. If the company performs poorly in the future or if the return on equity is below average, shareholders may not receive the expected returns.
Dividends received by shareholders in the form of shares cannot be directly withdrawn. Compared to cash dividends, bonus shares may limit shareholder choice and flexibility.
Overall, both bonus shares and cash dividends are ways for listed companies to reward shareholders. The choice between the two depends on the company's operating conditions and distribution policies, as well as shareholder needs and preferences.