Does the stock price really always drop on the ex-dividend date? A beginner's guide to dividend investing strategies

If a company can consistently pay dividends, it usually indicates a solid business model and healthy cash flow. Many long-term high-performing publicly traded companies have a tradition of stable dividends, and even Warren Buffett favors these high-yield stocks, with over 50% of his assets allocated to them.

However, for beginners, two common questions often arise: Will the stock price definitely fall on the ex-dividend date? Is the best entry point before or after the ex-dividend date? Today, we analyze the stock price performance on the ex-dividend date to see if this is an inevitable outcome.

Stock Price Drop on the Ex-Dividend Date Is Not Inevitable

Many believe that stock prices will definitely decline on the ex-dividend date, but in reality, this is not always the case.

Theoretical Price Adjustment works as follows: When a company pays out cash dividends, its assets decrease, so theoretically, the stock price should adjust downward by the dividend amount. For example, if a stock is valued at $35 per share, including $5 in cash reserves per share, and the company announces a $4 dividend per share, then on the ex-dividend date, the theoretical stock price should adjust from $35 to $31.

But actual market behavior is often more complex. Stock price movements are influenced by many factors—market sentiment, company performance, industry outlook, etc. For instance, Coca-Cola has a long history of stable dividends, but its performance on ex-dividend dates has been inconsistent. In September and November 2023, the stock saw slight increases on ex-dividend days, while at other times, it experienced small declines.

Apple Inc. provides a more obvious example. Over the past year, tech stocks have been in favor, and Apple’s stock has risen on multiple ex-dividend dates, from $182 to $186 on November 10, 2023, with a 6.18% increase on the May 12, 2023, ex-dividend date. Industry leaders like Walmart, PepsiCo, Johnson & Johnson also often see stock price increases on ex-dividend days.

Conclusion: The size of the dividend, market sentiment, and company fundamentals all jointly influence stock price movements on the ex-dividend date. A decline is common but not guaranteed.

How to Decide Before and After the Ex-Dividend Date?

The answer depends on three factors:

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, many investors may take profits early, especially those seeking tax advantages. At this point, the stock price may already reflect excessive expectations and face selling pressure. In such cases, buying on the ex-dividend date is not advisable.

2. Historical Price Trends

Historically, stocks tend to decline more often than rise after the ex-dividend date, which is unfavorable for short-term traders. However, if the stock price falls to a technical support level and stabilizes, it could be a good buying opportunity.

3. Company Fundamentals and Investment Horizon

This is the most critical factor. For companies with solid fundamentals and industry leadership, the ex-dividend adjustment is just a price correction, not a reduction in value. Conversely, a price decline may present an opportunity for investors to buy at a lower price. For such companies, buying after the ex-dividend date and holding long-term is often more profitable because the intrinsic value remains unchanged.

Understanding the Concepts of Fill-Right and Discount-Right

Fill-Right (填權息): After the stock goes ex-dividend, its price temporarily drops, but then gradually recovers as investors optimistic about the company’s prospects buy in, eventually returning to pre-ex-dividend levels. This indicates investor confidence in future growth.

Discount-Right (貼權息): After the ex-dividend date, the stock price remains depressed and fails to recover to pre-ex-dividend levels. This usually signals investor concerns about the company’s future performance, possibly due to poor earnings or market environment changes.

Don’t Overlook These Hidden Costs

Dividend Tax Cost

When purchasing ex-dividend stocks in a regular taxable account, even if the stock price drops, you still need to pay taxes on the received dividends. For example, buying at $35 and dropping to $31 on the ex-dividend date means you incur a capital loss of $4, but you also owe tax on the $4 dividend. Many investors overlook this cost.

Transaction Fees and Trading Taxes

In Taiwan’s stock market, the trading fee is calculated as: Stock Price × 0.1425% × Brokerage Discount Rate (usually 50-60%).
Trading tax is paid upon selling:

• Ordinary stock transactions: 0.3%
• ETFs: 0.1%

Every trade incurs these costs, and frequent trading can significantly erode returns.

How Should Investors Proceed?

Make decisions based on a comprehensive consideration of the above factors:

Long-term investors should focus on company fundamentals rather than short-term price fluctuations. High-quality companies’ dividends often provide opportunities to buy at lower prices, and holding long-term allows you to enjoy compound growth and stable dividends.

Short-term traders need to be more cautious. The tendency for prices to be high before the ex-dividend date and to decline afterward increases trading risk. Only consider buying if the price drops to a technical support level and the company’s fundamentals remain strong.

Tax planning is also important. Using tax-advantaged accounts (like IRA, 401K) to buy ex-dividend stocks can avoid dividend taxes, while taxable accounts require setting aside taxes.

Finally, remember: Investment decisions should be based on rational analysis, aligned with your investment goals and risk tolerance, rather than blindly chasing trends or overtrading.