Is it really worth buying after the dividend payout? Is a stock price decline an inevitable phenomenon?

Many listed companies with stable profits have a tradition of dividend payouts. This not only reflects a solid business model and ample cash flow but also attracts a large number of investors who consider high-dividend stocks as core holdings. Even the stock market legend Warren Buffett favors these types of stocks, allocating over 50% of his assets to high-dividend stocks.

However, for beginners new to dividend stocks, two key questions often arise: Will the stock price definitely drop on the ex-dividend date? Is it really a good time to buy after the dividend?

Will the stock price definitely drop on the ex-dividend date?

This seemingly simple question does not have an absolute answer.

Theoretical stock price adjustment

From a theoretical perspective, the stock price is indeed affected on the ex-dividend date. When a company distributes cash dividends to shareholders, its assets decrease accordingly, so the stock price should adjust downward on the ex-dividend date.

For example: Suppose a company has an annual earnings per share of $3, and the market values it at a P/E ratio of 10, making the stock price $30. The company has accumulated $5 per share in idle cash, so the total valuation is $35 per share.

If the company decides to pay a special dividend of $4 per share, retaining only $1 per share for future needs, then, theoretically, the stock price should drop from $35 to $31 on the ex-dividend date.

Real-world complexities

But actual situations are often more complex. Historically, stock prices on ex-dividend dates have risen or fallen; a decline is not guaranteed. This is because stock price movements are influenced by multiple factors, including market sentiment, company performance, and the overall economic environment.

For example, Coca-Cola, which has a long history of quarterly dividends, often sees a slight dip in stock price on ex-dividend dates. However, on September 14, 2023, and November 30, 2023, Coca-Cola’s stock actually rose slightly on these ex-dividend dates.

Apple Inc. shows even more notable performance. Over the past year, driven by enthusiasm for tech stocks, Apple’s stock often rose on ex-dividend dates. On November 10, 2023, the ex-dividend date, Apple’s stock increased from $182 to $186. On May 12, 2023, the day of the ex-dividend date, the stock rose by as much as 6.18%.

Similar “unexpected gains” frequently occur with leading stocks like Walmart, PepsiCo, and Johnson & Johnson. This indicates that strong stocks do not necessarily decline on ex-dividend dates; the key depends on market perceptions of the company’s prospects.

Stock price calculation under stock issuance (rights issue)

If the company issues new shares instead of cash dividends, the adjustment formula becomes more complex:

Post-issuance stock price = (Pre-issuance stock price - Issue price) / (1 + Issue ratio)

For example: Suppose a company’s stock is priced at $10 before a rights issue, with an issue price of $5, and a ratio of 1 new share for every 2 shares held:

Post-issue stock price = ($10 - $5) / (2 + 1) = $5 ÷ 3 ≈ $1.67

Is it more advantageous to buy after the ex-dividend date?

This depends on specific circumstances, but understanding two concepts is crucial: ex-rights and dividends and ex-dividends without rights.

Ex-rights and dividends: After the stock goes ex-dividend, the stock price may temporarily decline, but as investors remain optimistic about the company’s fundamentals, the stock price gradually recovers to or near pre-dividend levels. This indicates market confidence in the company’s future growth.

Ex-dividends without rights: After the ex-dividend date, the stock price continues to stay low and fails to recover to pre-dividend levels. This usually signals investor concerns about the company’s future performance, possibly due to poor earnings or changing market conditions.

Three decision perspectives

(1) Stock performance before the ex-dividend date: If the stock price has already risen to a high level before the ex-dividend date, many investors may choose to take profits early. Buying at this point might mean the stock already includes over-optimistic expectations and could face selling pressure. Therefore, purchasing on the ex-dividend date or the day before is generally not the best timing.

(2) The regularity of historical trends: Data shows that stocks tend to decline rather than rise after the ex-dividend date. This is unfavorable for short-term traders, as buying then carries a higher risk of loss. However, if the stock price continues to decline after the ex-dividend date until reaching a technical support level and shows signs of stabilization, it might be a good buying opportunity. The stock price at this point has been overly adjusted and may contain investment opportunities.

(3) The company’s fundamentals and long-term strategy: For solid, industry-leading companies, dividend payments are just normal price adjustments rather than a reduction in value. Conversely, the post-dividend price correction provides an opportunity for investors to acquire quality assets at a more favorable price.

If you plan to hold long-term, buying after the ex-dividend date is often a more cost-effective strategy because the company’s intrinsic value has not decreased due to the dividend.

Hidden costs of participating in dividend stocks

Tax considerations

Purchasing dividend stocks in qualified accounts (such as IRA, 401K) can temporarily avoid tax issues. But buying in a taxable personal account faces double taxation: dividends are taxed when received, and unrealized capital gains may also be taxed.

If dividends are reinvested and the stock price is expected to recover quickly, buying before the dividend payout makes more sense.

Transaction fees and taxes

In Taiwan’s stock market, the calculation method for trading fees is:

Stock price × 0.1425% × brokerage discount rate (generally 50-60%)

Transaction tax varies by stock type:

• Common stocks: 0.3%
• ETFs: 0.1%

Transaction tax = stock price × applicable tax rate

Although these costs seem small, frequent trading can gradually eat into returns.

Core points for investment decisions

Dividend stocks’ performance on ex-dividend dates is influenced by dividend amount, market sentiment, company performance, and other factors. Whether buying after the ex-dividend date is worthwhile ultimately depends on your judgment of the company’s fundamentals and your investment horizon.

Short-term investors should carefully evaluate the extent of price correction and rebound potential. Long-term holders often find that the price correction after dividends provides a good opportunity to acquire quality assets at lower prices.

Considering tax costs, transaction fees, and personal risk tolerance comprehensively enables rational investment decisions.