The truth about stock price fluctuations: Will buying stocks after dividends and rights issues really be cheaper?

Many investors feel both anticipation and confusion about the ex-dividend and rights issue event. On one hand, companies that regularly pay stable dividends often indicate healthy cash flows and solid business models; on the other hand, stock prices typically fluctuate on the ex-dividend date, leading to questions—does the stock necessarily fall after the dividend is paid? Is entering the market at that time truly a good deal?

The Theoretical Impact of Dividends and Rights on Stock Price

To understand why dividends and rights issues might influence stock prices, we need to first clarify their mechanisms.

The logic of dividends and rights is straightforward: When a company issues additional shares or distributes shares, its total share capital increases. Assuming the company’s overall value remains unchanged, the value represented by each share decreases proportionally, leading to a downward adjustment in stock price. This is akin to “dividing the cake”—the cake size stays the same, but the slices become smaller.

Dividends relate to cash flow: When a company pays cash dividends, this money flows out of the company’s assets. Although shareholders receive cash income, the company’s assets decrease, which in turn causes the stock price to adjust downward. Mathematically, this is valid.

For example: Suppose a company earns $3 per share annually, and the market values it at a P/E ratio of 10, so the stock price is $30. Over the years, the company has maintained steady profits and accumulated cash reserves. Assume the cash reserves amount to $5 per share, so the total valuation per share is $35.

If the company decides to distribute a special dividend of $4 per share, leaving $1 per share as reserve, then on the ex-dividend date, the stock price theoretically should drop from $35 to $31—that’s the so-called “dividend adjustment.”

But Reality Is More Complex

Here’s the key—theory is one thing, actual stock price behavior on the ex-dividend date is hard to predict.

Historical data shows that after the ex-dividend date, stock prices can both fall and rise. For example, Coca-Cola pays dividends quarterly, and its stock often dips slightly on ex-dividend dates, but on September 14 and November 30, 2023, the stock actually rose slightly. Apple Inc. shows a more pronounced effect—on November 10, 2023, the ex-dividend date, Apple’s stock rose from $182 to $186, a 2.2% increase; on May 12 this year, the stock surged by 6.18% on the ex-dividend date.

Why such “contrasts”? Because stock price movements are never determined by a single factor. Market sentiment, company performance, overall economic conditions, investor expectations about future prospects—all these factors combine to influence the stock’s price on the ex-dividend date. Sometimes, market optimism about a stock can offset the theoretical decline caused by dividends, even pushing the price higher.

Rights Issue and Discounted Rights: Understanding Long-Term Trends

Investors evaluating dividend-paying stocks often encounter two key concepts.

Fill-Back of Rights (填权息): After the ex-dividend date, the stock price may temporarily decline, but as investors grow optimistic about the company’s fundamentals and future prospects, the stock price gradually recovers to pre-dividend levels or close to them. This indicates market confidence in the company’s growth potential.

Discounted Rights (贴权息): After the ex-dividend date, the stock price remains sluggish and fails to return to pre-dividend levels. This often reflects investor concerns about the company’s future performance, possibly due to poor earnings or changing market conditions.

Using the earlier example, if after the ex-dividend date, the stock price rises from $31 back to $35, that’s a fill-back; if it remains below $31, that’s a discounted rights scenario.

When Is the Best Time to Buy? Three Factors to Consider

Factor 1: Stock Price Performance Before the Ex-Dividend Date

If the stock price has already risen to a high level before the ex-dividend date, caution is advised. Why? Because many investors may choose to lock in profits at this point, especially those seeking to avoid personal income tax. The stock price at this stage may already reflect excessive expectations or selling pressure, making buying riskier.

Factor 2: Historical Price Trends After the Dividend

Statistics show that stocks tend to decline more often than rise after the ex-dividend date. For short-term traders, this isn’t good news—buying in could carry a higher risk of loss. However, there’s a potential opportunity: if the stock price continues to fall to a technical support level and shows signs of stabilization, that could be a good entry point.

Factor 3: Company Fundamentals and Long-Term Holding Strategy

For high-quality companies with solid fundamentals and industry leadership, dividend payments and ex-dividend events are more like price adjustments rather than value destruction. From another perspective, stock price declines provide investors with a chance to buy quality assets at more attractive prices.

Therefore, for such companies, buying after the ex-dividend date and holding long-term is often more advantageous—because the intrinsic value of the company isn’t diminished by the dividend, and the price correction makes the stock more attractive.

Hidden Costs of Participating in Dividends and Rights

Beyond stock price fluctuations, investors should be aware of some often-overlooked costs.

Tax considerations on dividends

If you buy dividend-paying stocks within a tax-advantaged account (like a US IRA or 401(k)), tax issues are minimal. But if you hold them in a taxable account, the situation is more complex. Investors may face unrealized capital losses (if the stock price drops) and also need to pay taxes on received cash dividends. This “double pressure” is a hidden cost in dividend and rights investing.

Transaction fees and taxes

For example, in Taiwan’s stock market, the transaction fee is calculated as: stock price × 0.1425% × brokerage discount rate (usually 50-60%). When selling, you also pay a transaction tax:

• Regular stocks: 0.3%
• ETFs: 0.1%

While these costs seem small per transaction, frequent trading can significantly impact overall returns.

The Core of Rational Decision-Making

Stock price behavior on the ex-dividend date is influenced by multiple factors, with no absolute rule. Investors should:

1. Assess whether the stock price before the ex-dividend date is already high
2. Review the company’s historical success rate in filling rights
3. Analyze whether the company’s fundamentals are solid
4. Calculate the actual impact of taxes and transaction costs
5. Clarify whether they are engaging in short-term trading or long-term holding

For high-quality companies with strong fundamentals, the ex-dividend date may actually present a better opportunity to buy; for average companies, it could be just a trap. The key is thorough research, not blindly following the crowd.