Is a decline in stock price after the dividend payout inevitable? How should investors respond?

Many investors have this question: why do some high-dividend stocks drop in price after ex-dividend date? More importantly, is price decline after ex-dividend truly an unchangeable rule? In fact, there is no absolute answer. The movement of stock prices after ex-dividend is influenced by multiple factors; sometimes they fall, sometimes they rise. The key to investment decisions lies in understanding the underlying mechanisms, not blindly chasing after ex-dividend movements.

Companies with stable dividends usually represent solid business models and ample cash flow, which is why seasoned investors like Warren Buffett favor high-dividend stocks. However, for novice investors, the phenomenon of price dropping after ex-dividend often causes confusion, especially when deciding on buy or sell timing, leading to common misconceptions.

How Stock Prices Change on the Ex-Dividend Date

To understand why price drops after ex-dividend, first grasp how rights issues and dividends affect stock prices.

When a company pays dividends, it means a portion of its cash is distributed to shareholders. This cash was originally part of the company’s assets. Once paid out, the company’s total assets decrease accordingly. Assuming no change in the company’s fundamentals or market expectations, the value per share also decreases, leading to an adjustment in stock price.

Specifically, suppose a stock trades at $35 before the ex-dividend date, which includes the company’s operational value (assuming a P/E ratio of 10, with annual earnings per share of $3) plus accumulated cash of $5 per share. When the company declares a $4 per share dividend, on the ex-dividend date, the theoretical stock price should adjust to $31 ($35 minus $4).

The same logic applies to rights issues, though the calculation is more complex and depends on the issue ratio.

Why Do Prices Sometimes Rise and Sometimes Fall After Ex-Dividend — It’s Not Just the Dividend

While price adjustments on the ex-dividend date are common, a decline in price after ex-dividend is not an absolute rule. Looking at historical data, some stocks fall, others rise on the ex-dividend date. This reflects the market’s complexity.

Stock price movements are affected by multiple factors, not just the dividend:

Market sentiment and investor expectations: If investors are optimistic about a company’s future, they may push the stock higher even on the ex-dividend date. For example, Apple (AAPL) in recent years, driven by tech stock enthusiasm, has seen its stock rise on ex-dividend days. For instance, on November 10, 2023, Apple’s stock rose from $182 to $186, a 2.2% increase.

Company fundamentals and performance: Industry leaders like Walmart, PepsiCo, Johnson & Johnson, due to their stable earnings and market positions, often do not see significant drops on ex-dividend days; they may even be favored by investors.

Overall market trends and economic environment: Broader market movements, interest rate changes, inflation expectations, and macroeconomic factors can influence stock performance, sometimes offsetting or amplifying the dividend-related price adjustments.

Coca-Cola is a good example. With over a century of stable dividend payments, its stock on recent ex-dividend dates (September 14 and November 30, 2023) showed slight increases, while at other times, small declines occurred. This indicates that price drops after ex-dividend are not a strict law but result from multiple factors working together.

Rights Issue and Discount: Two Outcomes Every Investor Should Know

Before investing in dividend stocks, it’s important to understand two key concepts:

Fill-Back of Rights (填權息): After the ex-dividend date, the stock price initially adjusts downward, but as investor confidence in the company’s fundamentals grows, the stock gradually recovers to pre-dividend levels or close to them. This usually indicates optimism about the company’s future growth.

Discounted Rights (貼權息): The stock remains weak after the ex-dividend date, unable to recover to pre-dividend levels. This often reflects investor concerns about the company’s outlook, possibly due to declining earnings, industry downturns, or other risks.

The occurrence of these phenomena depends on the company’s fundamentals, industry prospects, and overall market conditions. Well-performing companies tend to experience “fill-back,” while weaker ones may remain discounted.

Investment Strategies Before and After Ex-Dividend: When Is the Best Time to Buy?

Does price decline after ex-dividend mean it’s a good buying opportunity? The answer depends on several key factors:

1. Examine the stock’s trend before the ex-dividend date:
If the stock has already risen sharply before the ex-dividend date, many investors may take profits, causing downward pressure on the stock price on and after the ex-dividend date. Buying at this point may not be wise, as the price may have already reflected overly optimistic expectations and could decline further.

2. Observe the typical price movement after dividends:
Statistically, many stocks tend to continue declining in the short term after ex-dividend rather than rebound immediately. For short-term traders, this presents higher risk. However, if the stock approaches technical support levels and shows signs of stabilization, it might be a better entry point.

3. Combine company fundamentals and investment horizon:
For stable, industry-leading companies, the ex-dividend date can be viewed as a price adjustment rather than a sign of value loss. Long-term investors may find buying after the price drops more attractive, as they acquire quality assets at a lower price. If the company eventually “fills back,” investors benefit from both dividend income and capital appreciation.

Hidden Costs Behind the Appearing Bargain

Investing in dividend stocks before or after ex-dividend also involves hidden costs that can significantly impact net returns:

Dividend Taxation:
In taxable accounts, dividends are taxed. For example, buying at $35 per share and the price dropping to $31 on ex-dividend day results in an unrealized loss of $4 per share, but the investor still needs to pay tax on the $4 dividend. This creates a situation of “receiving dividends, experiencing paper losses, and paying taxes.”
In tax-advantaged accounts like IRAs or 401(k)s, taxes can be deferred or avoided.

Transaction Fees and Taxes:
In markets like Taiwan, buying and selling stocks incurs fees (e.g., 0.1425% of transaction amount times broker discount rate) and taxes (e.g., 0.3% for stocks, 0.1% for ETFs). These costs accumulate with frequent trading.

Time and Psychological Costs:
Frequent trading around ex-dividend dates requires significant time for research and exposes investors to short-term volatility and stress, often underestimated by ordinary investors.

Rational Investing: Knowledge Is Profit

Understanding why prices tend to fall after ex-dividend is just the first step. Successful investing requires considering your own situation: Is the company’s fundamentals solid? Is your investment horizon long enough? What are your tax circumstances? What is your risk tolerance?

High-dividend stocks can provide steady cash flow for long-term investors but are not risk-free. The price fluctuations around ex-dividend can be both risks and opportunities—what matters is whether investors have enough knowledge and judgment to identify genuine investment opportunities.