Recently, I’ve noticed many friends asking about dividend and rights issues, especially whether it’s worthwhile to buy on the ex-dividend date. Actually, this is a very good question because many people get confused by this topic.

First, let’s state the conclusion: a stock’s price does not necessarily drop on the ex-dividend date. I’ve seen many cases where the stock price actually rises on the ex-dividend rights day, especially for stable, well-regarded blue-chip stocks. For example, Apple Inc., on November 10, 2023, the ex-dividend date, the stock price actually increased from $182 to $186, which is quite a significant gain. Old-established companies like Coca-Cola and Walmart also often see their stock prices rise on the ex-dividend date.

Why does this happen? The principle is quite simple. When a company pays out cash dividends, theoretically, the stock price should decrease by the dividend amount. For example, if a stock is priced at $35, which includes $5 in cash reserves, and the company decides to pay a $4 dividend, then on the ex-dividend date, the stock price should theoretically drop from $35 to $31. But in reality, stock price movements are influenced by many factors, not just the dividend payout. Market sentiment, company performance, and the overall economic environment all play roles.

So, is it worthwhile to buy on the ex-dividend date? It depends on several perspectives. First, look at how the stock price performed before the dividend. If the price has already risen to a high level, many investors might take profits early, making entering at that point less wise because the price already reflects over-optimism. Second, observe the historical trend of the company’s stock after paying dividends. Some stocks show a “fill-the-dividend” phenomenon, meaning after falling, the price recovers and even rises higher, indicating investor confidence in the company’s prospects. Conversely, if the stock price remains sluggish without recovery, it’s called “discounted dividend,” usually implying investor doubts about the company’s future.

The most important factor is the company’s fundamentals. If it’s a solid company with a stable industry position, the dividend payout is often just a part of the stock’s price adjustment, not a reduction in value. In such cases, buying on the ex-dividend date or afterward and holding long-term might be a good opportunity because you’re acquiring high-quality assets at a more favorable price.

Of course, tax considerations are also important. If you’re using a regular taxable account, you need to pay tax on the dividends received. Additionally, in Taiwan’s stock market, transaction fees are 0.1425% of the stock price (with some discounts), and when selling, you also pay a transaction tax (0.3% for regular stocks). These hidden costs should be taken into account.

Honestly, for investors seeking steady dividend income, the key isn’t necessarily buying on the ex-dividend date but choosing the right companies and holding long-term. However, if you aim to profit from short-term price fluctuations around the ex-dividend date, you’ll need different strategies. Some consider using derivatives like contracts for difference (CFDs) to participate in short-term volatility, which doesn’t require actual stock ownership or dividend tax payments but involves higher risks. You should decide based on your risk tolerance.

In summary, whether buying on the ex-dividend date is worthwhile depends on your investment goals, the company’s fundamentals, and the stock’s prior performance. If it’s a high-quality company and you plan to hold long-term, don’t worry too much about the timing—good companies will eventually fill the dividend gap. But if you’re trading short-term, you need to analyze price trends and market sentiment more carefully.