Will stock prices necessarily fall on the ex-dividend date? The truth investors need to know

Many investors, after entering the high-dividend stock arena, are often troubled by a core question: Will stock prices definitely fall on the ex-dividend date? Furthermore, should they buy after the ex-dividend date? The answers to these questions are not simply “yes” or “no,” but are influenced by multiple complex factors.

The popularity of high-dividend stocks indeed reflects their underlying business logic. A company that can consistently pay stable dividends usually indicates ample cash flow and a solid business model. Even “Warren Buffett,” the legendary investor, allocates over 50% of his assets to high-dividend stocks, demonstrating their appeal. However, for novice investors, stock price performance on the ex-dividend date often becomes a key reference for decision-making.

The Logic Behind Stock Price Fluctuations on the Ex-Dividend Date

Many believe that stock prices will necessarily drop on the ex-dividend date. This view is only half correct. Theoretically, when a company distributes cash dividends, it reduces its cash assets, which should lead to a downward adjustment in stock price. Based on market valuation logic, the stock’s closing price the day before the ex-dividend date should be reduced by the dividend amount, which is the theoretical price on the ex-dividend date.

For example: Suppose a company’s stock closed at $35 the day before, including $5 in cash reserves. If the company declares a special dividend of $4 per share, the theoretical stock price on the ex-dividend date would adjust to $31 ($35 - $4). It seems inevitable that the stock price will decline on the ex-dividend date.

However, in reality, the situation is often more complex. Take Coca-Cola as an example, which has a long history of stable dividends. Looking at recent data, on most ex-dividend dates, the stock experiences a slight decline, but there are also cases of small increases. Interestingly, Apple, in the past year, has shown significant price increases on ex-dividend dates—on November 10, 2023, for instance, Apple’s stock rose from $182 to $186 on the ex-dividend date, driven by strong demand for tech stocks.

Similar patterns are observed with industry leaders like Walmart, PepsiCo, and Johnson & Johnson. This indicates that the stock price movement on the ex-dividend date is influenced by multiple factors: the dividend amount, overall market sentiment, the company’s recent performance, and even industry trends.

Is Buying Stocks After the Ex-Dividend Date a Good Deal? Timing Is Critical

This question cannot be answered with a simple “yes” or “no.” Instead, it requires a comprehensive consideration of three aspects.

First, understanding two key concepts is crucial. “Fill-Right” (填權息) refers to stocks that, after paying dividends, experience a short-term decline but then recover or even surpass their pre-dividend levels as investor confidence in the company’s prospects grows. Conversely, “Stick-Right” (貼權息) describes stocks that remain depressed after the dividend, failing to recover to pre-dividend levels, often reflecting investor concerns about the company’s future.

Based on these concepts, when considering whether to buy around the ex-dividend date, the following factors should be evaluated:

• Pre-dividend stock performance: If the stock price has already risen significantly before the dividend, it may indicate that many investors have taken profits in advance. In such cases, entering just before the ex-dividend date could face selling pressure, making it less advisable.

• Historical post-dividend trends: Data shows that most stocks tend to decline after the dividend rather than immediately rise. For short-term traders seeking quick gains, this is unfavorable, as buying may lead to losses. However, if the stock continues to decline after the dividend and hits technical support levels with signs of stabilization, it could present a buying opportunity.

• Fundamental quality of the company: For fundamentally solid companies that are industry leaders, dividends often represent cyclical price adjustments rather than a decline in intrinsic value. Buying and holding such stocks after the dividend can be more profitable—since the company’s intrinsic value remains unchanged or even becomes more attractive after a price correction.

Hidden Costs That Cannot Be Ignored

Even if you understand the stock price mechanisms, you must consider several hidden costs in your decision-making.

Tax costs are a primary concern. If you hold stocks in tax-advantaged accounts (like IRAs or 401(k)s in the US), you generally don’t pay taxes on dividends. But in taxable accounts, the situation is more complex. Investors may face unrealized capital losses on the ex-dividend date while also owing taxes on received dividends. For example, if you buy at $35, and on the ex-dividend date the price drops to $31, you have a paper loss of $4 but must pay taxes on the $4 dividend. This “loss plus tax” scenario can be frustrating for short-term investors.

Transaction costs also need to be factored in. For example, in Taiwan’s stock market, buying and selling stocks involves two costs: a commission fee of 0.1425% of the transaction value (multiplied by the broker’s discount rate, usually 50-60%), and a transaction tax—0.3% for common stocks, 0.1% for ETFs, calculated directly on the stock price.

Though these costs seem small, they can accumulate significantly with frequent trading. For traders aiming to profit from short-term price swings around the dividend date, these costs can eat into potential gains.

Practical Checklist for Investment Decisions

When deciding whether and when to buy high-dividend stocks, consider the following checklist:

• Has the company maintained stable dividend payments over the past 3-5 years?
• Was the stock price already high before the dividend declaration?
• How have the company’s recent fundamentals (revenue, profit, cash flow) performed?
• Is your investment horizon short-term trading or long-term holding?
• Have you calculated and assessed the impact of taxes and transaction costs on your net returns?
• Based on historical post-dividend performance, what is the likelihood of “fill-right” (price recovery) versus “stick-right” (continued decline)?

For long-term investors seeking stable income, buying after the dividend payout and holding can allow them to benefit from compound growth, with hidden costs having less impact. For traders aiming to profit from short-term volatility, timing and cost control are critical.

In summary, whether stock prices fall on the ex-dividend date or whether buying afterward is advantageous depends on multiple factors. Investment decisions should be based on a deep understanding of the company’s fundamentals, an objective assessment of market conditions, and clarity about one’s investment goals and risk tolerance. Only by weighing these factors comprehensively can one make more rational and effective investment choices.