Part 4, on price adjustment, planted a flag: a dividend going ex is not free money. This article fully explains the mechanism of a company “handing out money” — the three distribution methods, the timeline, the price-adjustment formula, the tax tiers, and the illusion and speculation around “high bonus-share” schemes.
Three ways of “distributing”: completely different sources and destinations of money
A distribution plan in an annual report typically looks like this: “per 10 shares: ¥5 cash (pre-tax), 2 bonus shares, 3 conversion shares.” Unpacked, these are three completely different actions:
- Cash dividend （派）: ¥5 per 10 shares = ¥0.50 cash per share. The company wires retained earnings to your account as cash. This is the only action where value truly “flows out of the company.”
- Bonus shares （送）: 2 shares per 10 held — your share count ×1.2. The source is also retained earnings — just paid as shares instead of cash. Total shares outstanding grow, and the equity corresponding to each share is diluted.
- Capital-reserve conversion （转）: 3 shares per 10 held — your count ×1.3 again. The source is the capital reserve (money accumulated from over-subscribed IPOs and placement premiums) — a different accounting line, but for investors the effect is nearly identical to bonus shares: more shares, unchanged total value.
The three actions can be combined freely and are collectively called “dividend and share distribution.” To judge whether a distribution plan has sincerity, look only at how much cash it pays — bonus and conversion shares are number games (details below).
The timeline: four dates
- Plan announcement date: the board announces the distribution plan (with the annual/interim report).
- Shareholder-meeting approval: the plan is approved (essentially a formality).
- Record date (R date): whoever holds the stock at the close of this day qualifies for the distribution. To receive the dividend, buy by this day at the latest and hold through the close.
- Ex-rights/ex-dividend date (R+1): the price reference is adjusted downward, and the cash and new shares arrive (cash may lag a few days — check the announcement). Anyone who buys on this day gets no dividend — which is exactly why the dividend is stripped out of the price: buyer and seller interests are aligned with precision.
This answers the classic beginner question — “buy on the record date, take the dividend, and run the next day; isn’t that a sure profit?” No. You buy at ¥20, the dividend is ¥0.50, and the next day the price reference becomes ¥19.50 — money from one pocket to the other, plus you gratuitously owe taxes (see below).
The ex-rights/ex-dividend reference price: the formula is actually simple
The exchange publishes a reference price on the ex-date (note: it’s only the reference base for the call auction, not a guaranteed price):
Reference price = (record-date close − cash dividend per share) ÷ (1 + bonus/conversion shares per share)
Using the example above: record-date close ¥20, ¥5 cash per 10 shares (¥0.50 per share), plus 2 bonus and 3 conversion shares per 10 (0.5 shares per share):
Reference price = (20 − 0.5) ÷ (1 + 0.5) = 19.5 ÷ 1.5 = ¥13.00
The “previous close” you see the next day is 13.00. Your ledger: share count ×1.5, price 20 → 13, plus ¥0.50 cash per share — total market value untouched to the cent. The “candlestick cliff” from Part 4 is exactly this, and forward adjustment is what irons all such cliffs flat.
Dividend tax: the rate depends on holding time
Cash dividends are subject to personal income tax, and A-shares use tiered taxation based on holding period (the interval from buy to sell):
- Held ≤ 1 month: the full dividend is taxed at 20%;
- Held 1 month–1 year: halved — an effective rate of 10%;
- Held > 1 year: tax-free.
Collection is “distribute first, deduct later”: nothing is withheld when the dividend arrives; the tax is clawed back when you sell the stock, according to your holding time. So the “buy on the record date, sell the next day, pocket the dividend” maneuver not only nets zero on the price — it also sticks you with 20% dividend tax. The system is designed precisely to kill that arbitrage. The bonus/conversion portion involves no cash and incurs no dividend tax (conversions technically have a separate par-value tax detail — the amount is tiny; just know it exists).
Filling the gap vs. falling below it: the market language after ex-rights
After the price reference steps down on the ex-date, subsequent moves have dedicated terms:
- Filling the gap （填权）: the price climbs from the ex-rights price back to the pre-ex level (¥13 back up to ¥20). The traditional script for good companies — profits keep growing, and the market willingly buys the “diluted” price back up.
- Falling below it （贴权）: the price keeps sliding after ex-rights, drifting ever further from the pre-ex level.
The high bonus-share illusion deserves special emphasis. Plans like 10-for-10 or 20-for-10 conversions turn a ¥60 stock into a ¥20 one without changing a single punctuation mark of the company’s fundamentals — but visually it’s “cheaper.” In 2015–2016, “high bonus-share” speculation ran rampant in A-shares: the announcement would trigger limit-ups, retail investors would pile in chasing “low price + gap-fill expectations,” and major shareholders would take the chance to sell down. Regulators then tightened the rules (tying distribution ratios to earnings, cracking down on distributions coordinated with insider selling), and the play cooled. Remember the conclusion: bonus and conversion shares create no value whatsoever — they change how the cake is sliced, not the size of the cake. When you see a high bonus-share announcement, your first reaction should be to check whether any shareholders are lining up to reduce their holdings.
What dividends really mean
With the illusion cleared away, the value checklist for cash dividends:
- An endorsement of earnings authenticity — companies that can sustainably pay out real cash are unlikely to be faking profits (you can’t fake the money in a bank account);
- Reinvestment compounding — long-term investors reinvesting dividends is the main source of the dividend strategy’s excess returns;
- Downside protection — when a high-yield stock falls far enough to offer an even higher yield, quasi-fixed-income capital steps in to catch it, so volatility is relatively contained;
- A mandatory return mechanism — for mature companies with no growth reinvestment opportunities (banks, coal, utilities), dividends are the most efficient way to return money to shareholders.
Next article, the finale: northbound flows, “main capital,” the dragon-tiger list, and margin trading — what all those “money flow” figures in market apps actually are, and why most of them are noise.
Tax rates and rules are current policy at the time of writing; refer to the latest official announcements. This article does not constitute investment advice.