When we purchase shares of a listed company, we gain one of the basic rights of shareholders—the right to profit distribution. Many investors focus more on short-term price fluctuations and capital gains in their stock investments, often neglecting the company’s long-term earnings and dividend policies. However, for value investors, it is crucial to pay attention to the company's profitability and dividend policy, and understand how profits are transferred from the company to shareholders. So, how do listed companies transfer profits to shareholders?

Dividends: Direct Return of Profits：

Listed companies reward shareholders through dividends, which is the most common method of profit distribution. There are several forms of dividends:

1. Cash Dividends

Based on the company’s annual profits, after deducting losses, statutory reserves, and discretionary reserves, the remaining amount is distributed to shareholders in cash. This method is commonly referred to as "paying dividends" or "dividends," and shareholders receive cash according to their shareholding ratio.

For example, a company announces a cash dividend of $15 per 10 shares, with shareholders receiving $13.5 after taxes. If you own 1,000 shares, you will receive $1,350 in cash. This cash will be directly transferred into the shareholder's securities account on the dividend payout date announced by the company.

2. Stock Dividends (Bonus Shares or Rights Issue)

In addition to cash dividends, listed companies can also distribute profits through stock dividends, such as issuing bonus shares or rights issues. Bonus shares refer to the conversion of the company’s surplus reserves into additional shares, which shareholders will receive as extra stock. A rights issue provides shareholders with the opportunity to purchase new shares at a specified ratio.

For instance, if the company announces a bonus of 10 shares for every 10 shares held, you would go from owning 1,000 shares to 2,000 shares, with the share price dropping from $10 to $5, leaving the total market value unchanged. As the number of shares rises, the value of each share decreases proportionally, keeping the total market capitalization unchanged.The purpose of issuing bonus shares and rights issues is to increase shareholders' holdings, enhance the company’s capital strength, and support future development.

A key benefit of stock dividends is that the company can preserve cash for reinvestment or growth without impacting its cash flow. Growth-stage companies typically prefer stock dividends as they need funds to support their development.

Rising Share Prices: Indirect Profit Distribution

The rise in share prices is another important way shareholders benefit from company profits. The company’s net profit is closely linked to its stock price, with strong profitability often driving stock prices upward. The gain shareholders make from the appreciation of stock prices is essentially part of the company’s profit distribution. As the company’s profits continue to grow, the stock price naturally rises, and investors gain capital gains from the rising stock price. This is a direct manifestation of shareholders benefiting from the company's profits.

However, the increase in stock price does not equate to cash flowing into shareholders' pockets. It is merely a paper increase in shareholder wealth, which can only be converted into cash if the shareholder decides to sell at a high point. Therefore, the rise in stock price is typically an indirect form of profit transfer.

No Dividends: A Special Situation

Some companies, although highly profitable, choose not to pay cash dividends. This usually occurs in fast-growing companies, especially in the technology or growth sectors. These companies are more inclined to use profits to expand their businesses, increase R&D investment, or pay off debt rather than distributing cash.

For example, many start-ups or rapidly growing companies reinvest all their profits instead of distributing cash dividends to shareholders. This strategy aims to scale up the company, increase market share, and drive future earnings growth. Therefore, although these companies do not pay cash dividends, shareholders can still receive indirect returns through the appreciation of stock prices.

Other Forms of Return：

In addition to dividends and stock price increases, some companies may also reward shareholders through stock buybacks. A stock buyback is when the company buys its own shares on the open market, which typically leads to an increase in the proportion of shares held by existing shareholders and indirectly raises the earnings per share. Companies usually buy back shares when they believe the stock price is undervalued, thereby enhancing shareholder value.

Conclusion

Listed companies transfer their profits to shareholders in various ways, including cash dividends, stock dividends, and rising stock prices. For shareholders, the most direct return usually comes from cash dividends, while the increase in stock price represents an indirect profit transfer. Investors need to assess the company’s actual situation and development strategy to determine which form of return best aligns with their investment goals.