Why does the stock price fluctuate unpredictably after dividends? Master the investment strategies of filling rights and attaching rights.

What Does Stable Dividends Signify?

A company that can consistently distribute dividends to shareholders typically reflects a sound business model and strong cash flow. Many outstanding publicly listed companies have maintained this tradition over the long term. In recent years, investor interest in high-yield stocks has also increased, with even Warren Buffett allocating more than half of his assets to such stocks.

However, for investors new to the dividend stock market, two questions often trouble them: Does the stock price necessarily fall on the ex-dividend date? Should I buy before or after the ex-dividend date?

Is a Price Drop After the Ex-Dividend Date Unavoidable?

In theory, since shareholders have already received the cash dividend on the ex-dividend date, the company’s value represented by the stock should decrease accordingly, leading to a downward adjustment in the stock price. But from actual historical data, a price decline after the ex-dividend date is not necessarily a given. Especially for industry leaders with stable performance and high market recognition, there are many cases where the stock price rises on the ex-dividend date.

How Do Rights Issues and Dividends Affect Stock Prices

In the case of rights issues and dividends, the company expands its share capital through capital increases, which dilutes the value per share assuming the total company value remains unchanged. As a result, the stock price adjusts downward.

In the case of cash dividends, the payout essentially represents a reduction in the company’s assets. While shareholders receive cash, the stock price also tends to decrease accordingly.

Specific Case Analysis

Suppose a company’s annual earnings per share (EPS) are $3, and the market assigns a P/E ratio of 10 based on its competitive advantage, valuing each share at $30.

The company has accumulated cash over the years. Assume this cash amounts to $5 per share, making the total valuation $35 per share.

The company decides to pay a special dividend of $4 per share, retaining only $1 per share as emergency funds. Based on calculations, the theoretical stock price on the ex-dividend date should drop from $35 to $31.

In the case of a rights issue, the calculation formula is: Post-rights issue stock price = (Pre-issue price - Rights issue price) / (1 + Rights issue ratio)

For example, if a company’s stock price before the rights issue is NT$10, the rights issue price is NT$5, and the ratio is 2-for-1, then: Post-issue price = (10 - 5) / (2 + 1) = 5/3 ≈ NT$1.67

But the actual situation is much more complex

Although a price decline after the ex-dividend date is common, it is not always the case. Stock price movements are influenced by multiple factors—market sentiment, company performance, macroeconomic environment—and are not solely determined by dividends.

For example, Coca-Cola, as a long-term dividend payer, usually sees a slight drop in stock price on the ex-dividend date, but on September 14, 2023, and November 30, 2023, two ex-dividend dates, the stock actually experienced slight increases. Apple Inc. performed even more notably, often seeing significant gains on ex-dividend days due to the tech stock enthusiasm. On November 10, 2023, the ex-dividend date, its stock rose from $182 to $186, a 5.5% increase. On May 12, it increased by 6.18%.

Blue-chip stocks like Walmart, PepsiCo, and Johnson & Johnson also often see stock price rises on ex-dividend dates. The dividend size, market sentiment, and company performance collectively determine the stock price movement on these dates.

Is Buying After the Ex-Dividend Date More Cost-Effective?

It depends on the specific situation and should be evaluated from three perspectives:

Pre-Ex-Dividend Price Performance — If the stock price has already risen to a high level, many investors tend to realize profits or avoid tax burdens by selling beforehand. Entering the market at this point may face selling pressure and over-optimism, making it an unwise timing.

Historical Patterns of Post-Ex-Dividend Price Movements — Statistical data shows that stock prices tend to decline more often than rise after the ex-dividend date. Short-term traders face the risk of losses. However, if the stock price falls to a technical support level and shows signs of stabilization, it may be worth considering buying.

Fundamental Company Performance and Long-Term Holding Plans — For fundamentally solid companies with industry-leading positions, the ex-dividend adjustment is essentially a price correction rather than a value destruction. In fact, it can provide investors with an opportunity to acquire quality assets at a discount.

Concepts of Rights Issue and Discounted Rights Issue

Fill Rights and Dividends: After the ex-dividend date, the stock price gradually recovers as investors optimistic about the company’s prospects push the price back toward or near pre-dividend levels. This reflects investor confidence in the company’s future growth.

Discounted Rights Issue: If the stock price remains persistently low after the ex-dividend date and fails to recover, it may indicate investor concerns about the company’s performance, possibly due to poor earnings or market environment changes.

Hidden Costs of Participating in Ex-Dividend Stocks

Dividend Taxation — Using tax-deferred accounts (such as US IRA or 401K) eliminates worries about taxes. In taxable accounts, investors face a double burden: unrealized losses from stock price declines and taxes on received dividends. However, if dividends are reinvested and the stock price is expected to recover quickly, buying before the ex-dividend date can still be meaningful.

Transaction Fees and Taxes — For example, in Taiwan’s stock market, the transaction fee is calculated as: Stock price × 0.1425% × brokerage discount rate (about 50-60%).

Transaction taxes vary by stock type: 0.3% for common stocks, 0.1% for ETFs, calculated as: Stock price × applicable tax rate.

Rational Investment Decision-Making

The performance of stock prices after the ex-dividend date is influenced by multiple interacting factors. Investors should consider their own investment goals, risk tolerance, and combine analysis of pre- and post-dividend stock price trends, company fundamentals, and market conditions to make rational decisions. For high-quality companies, long-term holding often makes the ex-dividend date an even better opportunity to build positions.