Sell or hold after the dividend? Unlock the profit secret by understanding the dividend cycle

Many investors, when dealing with high-dividend stocks, often focus on “when to buy,” unaware that the more critical decision actually lies in “when to sell.” If buying before the ex-dividend date is to receive the dividend, then selling after the ex-dividend date may be the best window to lock in profits. In fact, many seasoned investors pay special attention to the timing of selling after the ex-dividend date because it not only helps avoid tax burdens but also allows for optimizing returns based on market sentiment changes.

Many consistently paying stable dividends listed companies demonstrate solid business models and healthy cash flows. Warren Buffett himself favors such companies, allocating over 50% of his assets to high-dividend stocks. An important principle in his holding strategy is to reduce or sell holdings at appropriate times, rather than blindly holding long-term.

Why Selling After the Ex-Dividend Date Is the Choice of Smarter Investors

On the surface, a drop in stock price on the ex-dividend date is a normal phenomenon. When a company distributes cash dividends to shareholders, its assets decrease, and the stock price adjusts accordingly. Suppose a company’s stock is valued at $35 per share before the ex-dividend date, including an expected $4 dividend per share; theoretically, on the ex-dividend date, the price adjusts to about $31.

But this presents an overlooked opportunity: buy before the ex-dividend date and sell after. This simple operation contains complex market logic.

First, stock prices often rise before the ex-dividend date due to investors rushing to buy in anticipation of the dividend. Investors who positioned early have already accumulated unrealized gains. Second, on the ex-dividend date, prices usually adjust downward, but subsequent movements vary—some stocks quickly recover (fill the gap), others continue to decline. Smart investors choose to sell during this volatility period rather than passively waiting for the price to recover or risking further declines.

Take Coca-Cola as an example. The company has decades of stable dividend history, paying quarterly. Observing its past ex-dividend performance, stock prices typically show slight adjustments on the ex-dividend day, but within one to two weeks, the market often re-prices based on company performance and economic conditions. Investors who sell on the ex-dividend day or during the subsequent rebound can lock in better returns than simply holding for dividends.

Apple Inc. illustrates this even more clearly. The company also pays quarterly dividends, but its post-ex-dividend price movements are heavily influenced by tech sector sentiment. During some ex-dividend cycles, Apple’s stock rebounds quickly or even hits new highs, allowing sellers to gain capital gains far exceeding the dividend. Conversely, investors waiting for the next dividend may face losses if the stock price declines afterward.

Three Key Timing Strategies for Selling on the Ex-Dividend Day

Timing 1: Buy before the ex-dividend date at a high, sell on rebound after

Within two weeks before the record date, many stocks tend to rise significantly due to anticipated dividends. Investors who have accumulated positions at lower prices can consider selling at higher levels. This “buy before, sell after” swing trading profits from short-term price fluctuations rather than just dividend income.

Once the ex-dividend date arrives and the stock adjusts downward, if within one to three trading days the price rebounds, that signals a good selling opportunity—allowing you to avoid potential subsequent declines.

Timing 2: Decide whether to continue holding based on whether the stock fills the rights issue or remains discounted

“Filling the rights issue” refers to the stock gradually recovering to pre-dividend levels or higher after the ex-dividend date. “Remaining discounted” means the stock stays low without rebounding.

These phenomena reflect market expectations of the company’s future prospects. If a company’s fundamentals are strong and it’s industry leader, it often experiences fill-the-gap (fill rights) after ex-dividend. If, after three to five weeks, the stock shows no signs of rebound, it may indicate a risk of continued discount, and investors should consider selling to avoid further losses.

Industry giants like Walmart, Pepsi, and Johnson & Johnson, with stable fundamentals, tend to fill the gap after ex-dividend. But this doesn’t mean investors should passively hold—rather, they should consider selling during the fill process to lock in gains.

Timing 3: Tax considerations driving the sell decision

Many investors overlook this point. In tax-advantaged accounts like IRAs or 401(k)s, dividend income is deferred and not taxed immediately, giving more flexibility. In taxable accounts, dividends are taxed as income, so selling immediately after the ex-dividend date can be strategic—locking in capital gains or losses to offset dividend taxes.

For example, if you buy at $35 per share, and on the ex-dividend date the price drops to $31 but then rebounds to $33, selling at $33 results in a $2 loss. While a loss, this can be used to offset other gains or reduce taxable income, making active tax planning more advantageous than passive holding.

How to Plan Taxation After Selling to Prevent Profit Erosion

Tax costs related to ex-dividend transactions often exceed expectations. First, dividend income is taxed, then there are transaction costs.

Dividend Tax Planning

If you buy ex-dividend stocks in a regular taxable account, dividends are taxed at applicable rates (15% or 20% for qualified dividends, up to 37% for non-qualified). Selling immediately after the ex-dividend date allows you to control when the taxable event occurs—concentrating gains or losses in a short period rather than multiple dividend payments over time.

Transaction Costs

In markets like Taiwan, buying and selling stocks incurs brokerage fees and transaction taxes. Brokerage fees are calculated as stock price times 0.1425% times the discount rate (usually 50-60%). Transaction tax is 0.3% for stocks, 0.1% for ETFs.

This means that the stock price movement during ex-dividend periods (typically 2-5%) is usually enough to cover these costs, making short-term swing trading economically feasible.

Long-term Holding vs. Rolling Strategies: Advanced Approaches to Selling Post-Ex-Dividend

For fundamentally solid blue-chip stocks, investors face a choice: hold long-term for steady dividends or adopt a rolling, swing trading approach around the ex-dividend date.

Long-term holding suits those seeking stable passive income

If your goal is to build a steady income stream, holding high-dividend stocks long-term is straightforward. These investors focus on accumulating dividends for compound growth, and ex-dividend dates are not necessarily signals to sell—they can be confirmation of stock quality.

Rolling strategies suit active investors with market judgment

If you have strong market insight and risk tolerance, you might consider “buy before, sell after” swing trading around ex-dividend dates. This approach allows you to collect dividends and short-term capital gains, while actively managing tax burdens and risk exposure.

A practical tip is to set clear rules: for example, if after ex-dividend the stock rebounds more than 1% within three days, sell part of your position; if no rebound occurs within a week, consider exiting entirely to avoid further discount-related losses.

For those aiming to capture short-term volatility during ex-dividend periods without long-term risk, derivatives like CFDs can be used. These instruments enable leveraged trading with lower capital, supporting both bullish and bearish strategies. Since you don’t hold the actual stock, you avoid dividend taxes, which is advantageous for short-term traders.

Practical Framework for Ex-Dividend Selling Decisions

Based on the above, investors should consider these factors when deciding whether to sell after the ex-dividend date:

1. Assess pre-ex-dividend price performance: If the stock has already risen significantly before the ex-dividend date, it indicates the dividend expectation is priced in. Selling then can avoid subsequent corrections.

2. Observe market reactions post-ex-dividend: Monitor stock performance on the ex-dividend day and the following 3-5 days. If the price quickly recovers (fills the gap), it signals market confidence; if it continues to decline, deeper fundamental issues may exist, and selling is prudent.

3. Calculate tax and transaction costs: Ensure expected short-term gains cover brokerage fees, taxes, and the dividend tax itself. Usually, a 2-5% price movement is sufficient.

4. Align with your investment goals: Long-term investors may ignore short-term fluctuations, while swing traders should establish clear rules for selling after ex-dividend.

In summary, selling after the ex-dividend date is not taboo but a well-considered decision. It helps lock in profits, mitigate risks, and manage tax liabilities more effectively. The key is to develop a strategy aligned with your investment style, time horizon, and risk appetite, making the most of the ex-dividend cycle.