Sell after the ex-dividend date to seize the right opportunity — The truth and pitfalls of high-dividend stocks

Stable dividend-paying listed companies often indicate solid business models and healthy cash flows. This is also why more and more investors consider high-dividend stocks as core holdings, and even Warren Buffett’s portfolio allocates over 50% to such stocks.

However, for novice investors in dividend stocks, there are often two core questions: Will the stock price definitely drop on the ex-dividend date? Should I buy before or after the ex-dividend date? Can selling after the ex-dividend date help avoid risks?

Is a Drop in Stock Price on the Ex-Dividend Date Inevitable?

In theory, the stock price should indeed decline on the ex-dividend date. Because the company pays cash dividends to shareholders, which reduces the company’s assets, the value per share also decreases accordingly.

But in actual market performance, a drop in stock price on the ex-dividend date is not necessarily guaranteed. Especially for stable, well-loved blue-chip stocks, the price may even rise on the ex-dividend date.

Let’s use specific numbers to understand how dividends affect stock prices:

Suppose a company earns $3 per share annually, valued at a P/E ratio of 10, making the stock price $30. The company has accumulated excess cash on its balance sheet, with $5 per share in idle cash, giving a total valuation of $35.

The company decides to distribute $4 per share in cash dividends, leaving only $1 per share as reserve. According to the theoretical formula, the stock price on the ex-dividend date should adjust from $35 to $31 ($35 - $4 = $31).

In the case of a stock split, calculations are a bit more complex, with the formula: Post-split stock price = (Pre-split stock price - Split price) / (1 + Split ratio)

For example, if a stock’s pre-split price is 10 yuan, with a split price of 5 yuan, and a 2:1 split, then: Post-split price = (10 - 5) / (2 + 1) = 5/3 ≈ 1.67 yuan

But stock price movements are influenced by more than just dividends

In reality, stock prices on the ex-dividend date can go up or down. Coca-Cola is a typical example—this company has a stable quarterly dividend tradition. On the ex-dividend dates of September 14, 2023, and November 30, 2023, the stock price actually rose slightly, while at other times it declined.

Apple’s performance is even more notable. On the ex-dividend date of November 10, 2023, Apple’s stock price rose from $182 to $186. On May 12, the ex-dividend date, the increase was as high as 6.18%.

Industry leaders like Walmart, Pepsi, Johnson & Johnson also often see stock price increases on ex-dividend days. This indicates that dividend amount, market sentiment, company performance, and other factors collectively determine stock price movements.

The Strategy Differences Between Buying and Selling After the Ex-Dividend Date

Fill rights and dividends vs. Ex-rights and dividends

Understanding two key concepts is important:

Fill rights and dividends: After the stock goes ex-dividend, the stock price temporarily drops, but as investors remain optimistic about the company’s prospects, the price gradually recovers to pre-dividend levels or close to them. This suggests the market is optimistic about the company’s future growth.

Ex-rights and dividends: After the ex-dividend date, the stock price remains depressed and fails to recover to pre-dividend levels. This usually reflects investor concerns about the company’s performance.

Referring back to the earlier example, if the stock price recovers from $31 to $35 after the ex-dividend date, it has completed a fill rights and dividends scenario. Conversely, if it does not recover, it is a case of ex-rights and dividends.

The reference value of stock price movement before the ex-dividend date

If the stock price has already risen to a high level before the ex-dividend date, many investors will take profits early, especially those wanting to avoid tax burdens. Investors entering at this point face a stock price that has been over-anticipated and may be under selling pressure, making the risk relatively higher.

Historically, stocks tend to be more likely to decline rather than rise after the ex-dividend date. This is not friendly to short-term traders. But if the stock price has fallen to a technical support level and shows signs of stabilization, selling before the ex-dividend date might be a better entry point.

Long-term holding considerations

For companies with solid fundamentals and industry leadership, the ex-dividend adjustment is just a price correction, not a reduction in value. For such companies, the ex-dividend event can actually provide investors with an opportunity to acquire quality assets at a more favorable price.

For these companies, buying after the ex-dividend date and holding long-term is often more cost-effective because the intrinsic value of the company has not decreased due to the dividend payout.

Hidden Costs of Participating in High-Dividend Stocks

Tax considerations

Using tax-advantaged accounts (such as US IRA, 401K) to buy dividend stocks can be tax-free. But in taxable accounts, investors face double taxation—paying taxes on cash dividends and potentially incurring capital losses.

Transaction fees and trading taxes

In Taiwan’s stock market, the trading fee is calculated as: Stock price × 0.1425% × discount rate (usually 50-60%)

When selling, additional transaction taxes are payable:

• Ordinary stocks: 0.3%
• ETFs: 0.1%

Transaction tax = Stock price × tax rate

These costs can significantly erode returns when trading frequently.

Comprehensive Considerations for Investment Decisions

The stock price performance of dividend stocks on the ex-dividend date is influenced by multiple factors. Investors should consider: the pre-dividend stock price trend, historical performance after dividends, whether the company’s fundamentals are solid, and whether they plan to hold long-term.

Selling before the ex-dividend date to avoid risk assumes the stock price is high and market sentiment is weakening. Conversely, selling after the ex-dividend date depends on observing the fill rights progress. Rational investment decisions should be based on individual risk tolerance and actual return goals, rather than blindly following the stock price movements on the ex-dividend date.