Will the stock price definitely drop on the dividend payout date? How can smart investors seize the opportunity to buy during the ex-dividend period?

Many professional investors favor high-dividend stocks, which typically represent companies with solid business fundamentals and ample cash flow. In fact, publicly traded companies that can consistently pay stable dividends often perform better over the long term. In recent years, this trend has become even more popular, with even investment masters allocating more than half of their assets to high-dividend stocks.

However, for novice investors just entering the stock market, there are two core concerns surrounding ex-dividend and dividend-paying stocks: Will stock prices necessarily fall on the ex-dividend date? Is the best time to buy before or after the ex-dividend date?

The Truth About Stock Price Drops on the Ex-Dividend Date

There is a common belief in the market: on the ex-dividend rights day, since shareholders have already received the dividend rights, the stock’s value must decrease accordingly, leading to a drop in stock price. However, based on actual historical data, a decline in stock price on the ex-dividend rights day is not an iron law. Especially for industry leaders with stable earnings, continuous dividends, and strong investor appeal, it is not uncommon for stock prices to rise on the ex-dividend date.

How Do Rights Issues and Dividends Affect Stock Prices

To understand this phenomenon, we need to grasp the mechanics of rights issues and dividends:

In rights issues, the company increases its share capital by issuing additional shares. Under the premise that the total company value remains unchanged, the value per share decreases accordingly, so the stock price adjusts downward.

In dividends, the company distributes cash dividends, which effectively reduces the company’s assets. Although shareholders receive cash, the stock price also adjusts downward accordingly.

Case Study Analysis

Let’s use an example to understand the math behind dividends:

Suppose a company has an average annual earnings per share of $3. Based on industry competition and business advantages, the market assigns a P/E ratio of 10, meaning the stock price is $30.

Over time, the company has stable profits and accumulates cash reserves on its books, reaching $5 per share. The company’s total valuation thus reaches $35 per share.

Management believes this excess cash does not need to be fully retained and decides to distribute a $4 per share special dividend, keeping $1 per share as emergency funds. The company announces the dividend on June 17, 2025, with the record date on June 15.

According to market rules, the ex-dividend date is usually the same as the record date. On the ex-dividend date, the theoretical stock price should be the previous day’s closing price minus the dividend paid, dropping from $35 to $31 per share.

If a rights issue is involved, the calculation becomes more complex. The formula is: Post-rights stock price = (Pre-rights stock price - Rights issue price) / (1 + Rights issue ratio)

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

Actual Performance vs. Theoretical Expectations

While theoretically, stock prices should decline on the ex-dividend date, actual historical trends are far from this simple. Price movements are influenced by market sentiment, company performance, market environment, and other factors, not solely by the ex-dividend event.

For example, Coca-Cola has a long history of paying dividends quarterly. Most ex-dividend days see slight price adjustments downward, but some periods also see slight increases. Data from recent years show that on September 14, 2023, and November 30, 2023, Coca-Cola’s stock rose slightly on the ex-dividend days, while on June 13, 2025, and March 14, 2025, it declined slightly.

Apple Inc. is another typical case. The company pays quarterly dividends, and in the past year, due to the popularity of tech stocks, Apple often experienced significant gains on ex-dividend days. For example, on November 10, 2023, the ex-dividend day, the stock rose from $182 to $186; on May 12 of this year, it even saw a 6.18% increase.

Blue-chip stocks like Walmart, Pepsi, Johnson & Johnson also frequently see stock price increases on ex-dividend days.

Overall, the amount of dividend paid, market sentiment, operational performance, and other factors all jointly influence the stock price movement on the ex-dividend date.

Is Buying on the Ex-Dividend Date More Cost-Effective?

This question requires case-by-case analysis. Investors should consider from three perspectives:

• Has the stock price already risen to a high level before the ex-dividend date?
• What is the historical trend of stock prices after dividends are paid?
• The company’s fundamentals and personal holding plans

Key Concepts of Rights and Puts

When evaluating ex-dividend stocks, two key concepts must be understood:

Fill-Right: After the ex-dividend, although the stock price temporarily drops, with investors optimistic about the company’s fundamentals and growth prospects, the stock price gradually recovers to or near the pre-dividend level. This reflects investors’ optimism about the company’s future growth.

Post-Right: The stock price remains depressed for a period after the ex-dividend and fails to recover to pre-dividend levels. This usually indicates investor concerns about the company’s outlook, possibly due to declining performance or changing market conditions.

Referring back to the earlier example, if the stock price rises from $31 back to $35 after the ex-dividend, it is considered a fill-right; otherwise, it is a post-right.

Three Major Considerations

(1) The stock price position before the ex-dividend date is crucial

Before the ex-dividend rights day, if the stock price has already risen to a relatively high level, many investors will choose to take profits early, especially those seeking to avoid dividend tax burdens. At this point, considering buying on the ex-dividend date, the stock price may have already reflected excessive expectations or face selling pressure, making the actual risk higher.

(2) Historical trend after dividends tend to decline

Looking back, stocks tend to adjust downward rather than rebound after dividends are paid. This is not favorable for short-term profit seekers, as buying afterward may lead to losses. However, if the stock price continues to fall to a technical support level and shows signs of stabilization, this could be an opportune time to establish a position.

(3) The perspective of solid company fundamentals

For fundamentally sound companies with industry-leading positions, dividend actions should be viewed as part of normal price adjustments rather than signs of value destruction. In fact, this may provide investors with opportunities to acquire high-quality assets at more attractive prices. Therefore, for such stocks, buying after the dividend and holding long-term is often the most cost-effective strategy. The intrinsic value of the company does not diminish due to dividends; instead, a price correction might make the stock more attractive.

Hidden Costs in Ex-Dividend Trading

Tax Implications on Dividends

If investors hold ex-dividend stocks in qualified accounts (such as US IRA, 401K, or other tax-deferred accounts), they generally do not need to worry about taxes, as withdrawals from these accounts are not taxed before distribution.

However, in regular taxable accounts, the situation is more complex. Using the earlier example, if an investor buys at $35 before the ex-dividend date, and on the ex-dividend day the price drops to $31, the investor receives $4 in dividends but also faces unrealized capital loss and must pay taxes on the received dividends.

Only if the investor plans to reinvest the dividends into the same company and expects the stock price to recover quickly from the dividend payout does buying before the ex-dividend date make sense.

Transaction costs and taxes

Beyond taxes, securities exchanges in various regions also charge trading fees and transaction taxes. For example, in Taiwan stock market:

Commission calculation: Stock price × 0.1425% × brokerage discount rate (generally 50-60%)

Transaction tax calculation:

• Ordinary stocks: 0.3%
• ETFs: 0.1%

Transaction tax = Stock price × applicable tax rate (0.3% or 0.1%)

Rational Framework for Investment Decisions

The stock price performance of dividend-paying stocks on the ex-dividend date is influenced by multiple factors. Investors should consider dividend amount, market sentiment, company performance, and their own investment goals and risk tolerance to make rational decisions.

While short-term fluctuations exist, for investors optimistic about the company’s long-term prospects, the ex-dividend date may be an ideal opportunity to acquire quality assets at a lower cost. The key is to accurately assess the company’s fundamentals rather than be misled by short-term stock price movements.