Is it normal for stock prices to drop on the ex-dividend date? How should investors respond to this common phenomenon?

Many novice investors entering the high-dividend stock world often face a long-standing question: does the stock price always drop on the ex-dividend date? Furthermore, they want to know when is the best time to buy to maximize gains amid the price decline on that day. Today, we’ll explore this common market phenomenon in depth.

A stable dividend payout system often reflects a company’s sound business model. Many well-performing listed companies maintain a tradition of regular dividends. Warren Buffett himself favors high-dividend stocks; over half of his portfolio is invested in stable dividend-paying companies. This demonstrates the long-term appeal of consistent dividends for investors.

Why does the stock price typically adjust on the ex-dividend date?

To understand why stock prices tend to fall on the ex-dividend date, we need to grasp the mechanics of dividend and rights adjustments.

When a company decides to distribute cash dividends to shareholders, the company’s assets effectively decrease. Imagine a company valued at $35 per share, which includes $5 of accumulated cash reserves per share. If the company declares a special dividend of $4 per share, that cash leaves the company. Theoretically, the company’s value per share should adjust downward from $35 to $31.

This explains why, on the ex-dividend date, stock prices often decline—reflecting the company’s loss of cash assets.

The same logic applies to stock splits. When a company issues additional shares, the value per share is diluted. For example, if a stock trades at $10 per share and a 2-for-1 split occurs at a $5 issue price, the theoretical post-split price would be about $3.33 per share (calculated as ($10 - $5) / (2 + 1) ≈ $3.33).

Is a price drop on the ex-dividend date inevitable? What does history tell us?

This is a common misconception among investors. Price declines on the ex-dividend date are not guaranteed.

Looking at actual market performance, the price movement on ex-dividend days varies widely. For example, Coca-Cola has a long history of quarterly dividends. Usually, its stock price slightly adjusts downward on the ex-dividend date, but in some cases, it even rises slightly. Notably, in two ex-dividend dates in 2023, Coca-Cola’s stock experienced small gains.

Apple’s performance is even more illustrative. Due to strong market interest in tech stocks, Apple often shows robust gains on ex-dividend days. For instance, on November 10, 2023, Apple’s stock jumped from $182 to $186 on the ex-dividend date, with gains exceeding 6% later.

Leading companies like Walmart, PepsiCo, Johnson & Johnson also frequently see stock price increases on ex-dividend days.

This indicates an important fact: the occurrence of a price drop on the ex-dividend date is influenced by multiple factors—dividend size, overall market sentiment, company performance, and investor expectations for the future. A single dividend event does not determine the final stock price movement.

Timing: buy before or after the ex-dividend date?

The answer depends on the investor’s goals and judgment of the specific stock. We should consider three perspectives:

1. Price trend before the ex-dividend date

If the stock price has already risen significantly before the ex-dividend announcement, some investors aiming to lock in profits may sell early, especially those seeking to avoid dividend tax. New investors entering at this point should be aware that the price may have already reflected overly optimistic expectations and could face selling pressure. In this scenario, the risk of a price decline on the ex-dividend date is higher.

2. How does the stock usually perform after the ex-dividend date?

Historical data shows that stocks tend to adjust downward after the ex-dividend date rather than rebound immediately. For short-term traders, this means a higher chance of short-term losses after buying. However, if the stock stabilizes at a technical support level after the adjustment, it could present a buying opportunity.

3. Company fundamentals and investment horizon

For fundamentally strong companies with leading positions in their industries, the ex-dividend date should not be seen as a sign of declining value. Instead, it can be an opportunity for long-term investors to buy quality assets at a lower price. In other words, price adjustments after the ex-dividend date may be a good entry point for long-term holdings.

Understanding “fill-the-rights” and “stick-the-rights” phenomena

Investors need to understand two key concepts related to ex-dividend stocks:

• “Fill-the-rights” refers to stocks that, after the ex-dividend date, initially decline but gradually recover and may return to or surpass their pre-dividend levels. This usually reflects market optimism about the company’s future growth.

• “Stick-the-rights” describes stocks that remain depressed after the ex-dividend date and fail to recover to pre-dividend prices. This often indicates market concerns about the company’s outlook, possibly due to declining earnings or industry challenges.

For example, if a stock was $35 before the ex-dividend date, drops to $31 on the day, but eventually recovers to $35, it has “filled the rights.” If it stays below $35 without recovery, it exhibits “stick-the-rights.”

Hidden costs of participating in dividends

Beyond stock price fluctuations, investors should consider additional costs associated with dividend participation.

Tax implications are primary

In tax-advantaged accounts like IRAs or 401(k)s in the US, investors typically don’t pay taxes on dividends. However, in taxable accounts, the situation differs. Investors may face unrealized capital losses due to price drops on the ex-dividend date while still owing taxes on received dividends. If dividends are insufficient to offset the loss from the price decline, the investor effectively loses money and still pays taxes.

Trading costs are also significant

For example, in Taiwan’s stock market, trading involves several fees. The brokerage fee is 0.1425% of the transaction amount multiplied by the discount rate (usually 50-60%). Selling stocks incurs a transaction tax—0.3% for regular stocks and 0.1% for ETFs. Although these fees seem small, they accumulate over multiple trades, reducing net returns.

Therefore, frequent trading around ex-dividend dates may not be cost-effective.

Investment timing around the ex-dividend date

Based on the above, the key question is: how can investors maximize returns amid the common price declines on ex-dividend days?

For long-term investors seeking stable income, holding high-quality dividend stocks is a cost-effective strategy. Short-term traders aiming to capitalize on price swings need to consider additional factors.

If avoiding dividend taxes and aiming for higher gains through price differences, traders might consider derivatives like CFDs (Contracts for Difference). These instruments allow controlling larger positions with less capital, supporting both bullish and bearish strategies. If the market moves as expected, short-term gains can surpass the returns from simply holding the stock for dividends. However, leverage also increases risk, so investors should use them cautiously according to their risk tolerance.

Ultimately, regardless of strategy, investors should base decisions on their goals, risk appetite, and company analysis. While price declines on ex-dividend days are common, they are not inevitable. Proper timing and risk management are key to long-term success.