Will the stock price rise before the dividend payout? Analyzing the stock price patterns before and after the ex-dividend date

Companies that consistently pay stable dividends usually represent solid business models and healthy cash flows. Many high-performing companies have established a tradition of stable dividend payments, attracting more investors to consider high-dividend stocks as core assets. However, for novice investors in dividend stocks, the most common question is: Will the stock price rise before the ex-dividend date? What are the actual patterns of stock price changes on the ex-dividend date?

The Truth About Stock Price Performance on the Ex-Dividend Date

Stock prices can indeed rise before the ex-dividend date, but it’s not guaranteed. From a theoretical perspective, stock prices should decline on the ex-dividend date because the company pays out cash dividends, which reduces assets and the actual value represented by the stock.

The specific calculation is as follows: suppose a company earns $3 per share annually, with a market P/E ratio of 10, making the stock price $30. If the company has accumulated an excess cash of $5 per share, the total valuation would be $35 per share. After announcing a special dividend of $4 per share, the stock price theoretically should adjust from $35 to $31 on the ex-dividend date.

But in reality, cases where stock prices rise before the ex-dividend date are also common. For example, Coca-Cola has a long history of quarterly dividends. Recent performance statistics show that on the ex-dividend dates of September 14, 2023, and November 30, 2023, Coca-Cola’s stock experienced slight increases. Apple Inc. is even more notable; on the ex-dividend date of November 10, 2023, the stock price rose from $182 to $186, an increase of over 2%.

Why Does the Stock Price Rise Before the Ex-Dividend Date? Multiple Factors at Play

Stock price movements are not solely influenced by the ex-dividend event but are the result of multiple factors:

Market Sentiment and Expectations: Investors’ optimistic outlook on a company’s future prospects can drive up the stock price. When the market perceives the company’s fundamentals as strong and growth as promising, the ex-dividend announcement can serve as a positive signal, attracting more capital.

Industry Performance and Overall Environment: Strong performance in specific industries can lift the stock prices of quality companies within that sector. For example, the continued rise of tech stocks in recent years has allowed giants like Apple to increase in value even on ex-dividend dates.

Symbolic Significance of Dividend Amounts: An increase in dividend payout often signals improved profitability, which can stimulate investor enthusiasm and push up the stock price before the ex-dividend date.

Capital Battles: Institutional investors and retail traders may engage in buying frenzies before the ex-dividend date, especially as the date approaches, leading to a surge in demand.

Is Buying Stocks After the Ex-Dividend Date Worth It? The Key Is These Three Points

1. The Stock Price Level Before the Ex-Dividend Date

If the stock price has already risen to a high level before the ex-dividend date, many investors may take profits early, creating selling pressure. Entering at this point could involve higher risks because the price already includes excessive expectations. Conversely, if the stock price remains stable or slightly increases before the ex-dividend date, it indicates market confidence, and subsequent performance is usually more sustainable.

2. Historical Performance of Ex-Rights and Ex-Dividend

“Fill rights and dividends” refer to the phenomenon where the stock price gradually recovers to pre-ex-dividend levels after the event, reflecting investor optimism about the company’s prospects. “Post-weakness and dividends” refer to stocks that remain depressed and fail to recover, often indicating investor doubts about future performance.

Data shows that leading companies with stable dividends (such as Walmart, Pepsi, Johnson & Johnson) tend to exhibit fill rights behavior, while less stable companies often show post-weakness. Therefore, the decision to buy after the ex-dividend date should focus on the historical fill rights performance.

3. Company Fundamentals and Investment Horizon

For companies with solid fundamentals and industry leadership, the ex-dividend adjustment is just a normal price correction and does not imply a loss of value. For such companies, the post-dividend dip can be an opportunity to buy quality assets at a better price. If planning to hold long-term, buying after the ex-dividend date is often more cost-effective.

Hidden Costs of Participating in Ex-Dividend Stocks

Dividend Tax Burden: When investing in taxable accounts, investors must pay taxes on dividends received. For example, in the case of buying at $35 and dropping to $31 after the ex-dividend date, investors face unrealized capital losses and must pay taxes on the $4 dividend, which can be a significant cost. In contrast, tax-advantaged accounts like IRAs can defer or avoid this tax burden.

Transaction Fees and Taxes: In Taiwan’s stock market, transaction fees are about 0.1425% of the stock price (with discounts of 50-60%), and a 0.3% transaction tax applies upon selling. Frequent trading can significantly erode returns.

Rational Investment Advice for Ex-Dividend Stocks

Based on the above analysis, investors should recognize that stock prices often rise before the ex-dividend date and may rebound afterward—this is normal market behavior. When making decisions, consider:

• The trend of the stock price before the ex-dividend date and whether profit-taking pressure has formed.
• The company’s historical fill rights ability and whether it has a sustainable dividend-paying record.
• Your own tax situation and investment horizon to choose appropriate entry points.
• The impact of transaction costs on overall returns; avoid over-trading.
• For fundamentally strong companies, long-term holding generally yields more stable returns than short-term speculation.

Investing in ex-dividend stocks essentially reflects confidence in the company’s ongoing profitability rather than a pure price arbitrage game.