Is it worth buying the day before the ex-dividend date? The three biggest truths every dividend investor must read

Many stable companies have a tradition of paying dividends regularly, which often reflects a sound business model and strong cash flow. In recent years, investors have increasingly favored high-dividend stocks, and even Warren Buffett has allocated over 50% of his assets to such stocks.

However, when it comes to ex-dividend dates, many novice investors often face a dilemma: Is it really cheaper to buy the day before the ex-dividend date? Will the stock price definitely drop? The answers to these questions are far more complex than they seem.

The Mathematics Behind Stock Price Adjustments on Ex-Dividend Days

First, it’s important to understand how dividends affect stock prices. When a company distributes dividends, this cash actually comes from the company’s assets. Theoretically, the dividend amount should correspond to an adjustment in the stock price.

For example: Suppose a company earns $3 per share annually, and with a market P/E ratio of 10, the stock price should be $30. The company has accumulated $5 in cash reserves, so the theoretical market value is $35.

If the company decides to distribute a special dividend of $4 per share, leaving only $1 in emergency funds, then on the ex-dividend date, the stock price should adjust from $35 to $31 ($35 - $4 = $31). This calculation seems simple, but in reality, market reactions often defy this expectation.

Stock splits are slightly more complex. Suppose a stock is priced at 10 yuan, with a split price of 5 yuan, and a ratio of 2-for-1 split, then the post-split price should be: (10 - 5) ÷ (2 + 1) ≈ 1.67 yuan.

Price Adjustment ≠ Guaranteed Drop

Here’s the key point: Although theoretically, stock prices should decrease on the ex-dividend date, in practice, they do not necessarily fall.

Coca-Cola is a typical example. The company has paid stable quarterly dividends for decades, but its stock price on ex-dividend days has not been consistent. On September 14, 2023, and November 30, 2023, Coca-Cola’s stock actually rose slightly; whereas on June 13, 2025, and March 14, 2024, it declined slightly. These variations reflect the combined influence of market sentiment, earnings expectations, and other factors.

Apple’s performance is even more notable. Benefiting from the tech stock boom, Apple often sees significant rises on ex-dividend days. On November 10, 2023, the stock price increased from $182 to $186; this year’s May 12 ex-dividend day saw a 6.18% increase.

Leading stocks like Walmart, Pepsi, Johnson & Johnson also often see stock price gains on ex-dividend days.

Conclusion: The stock price behavior on ex-dividend days depends on multiple variables, including dividend size, market sentiment, company performance, industry health, etc. It is not simply a mechanical decline.

Three Perspectives on Buying the Day Before the Ex-Dividend Date

Perspective 1: Observe the stock price trend before the ex-dividend date

Whether buying the day before the ex-dividend date is worthwhile depends first on whether the stock price has already risen to a high level beforehand.

Many investors take profits before the ex-dividend date, especially those seeking to avoid personal income tax, choosing to exit early. This means the stock price may have already priced in the dividend expectation and even experienced selling pressure. Entering at this point carries higher risk.

Perspective 2: Review historical stock price movements after dividends

Looking back, stocks tend to weaken after the ex-dividend date. For short-term traders seeking quick gains, this indicates a higher chance of incurring losses after buying.

But the key is: when the stock price hits a technical support level and shows signs of stabilization, that is often a better entry point. Blindly rushing to buy the day before the ex-dividend date may lead to chasing the high.

Perspective 3: Assess company fundamentals and holding period

For companies with solid fundamentals and industry leadership, dividends are essentially cyclical price adjustments rather than value destruction.

For such companies, dividends are more like an opportunity to buy additional shares at a better price. If planning to hold long-term, the post-dividend price correction might be a better entry point, as the intrinsic value of the company remains unchanged.

Rights Issue vs. Bonus Issue: The Decisive Factors in Investment Timing

Understanding these two concepts is crucial for judging the right timing to buy.

Rights Issue: After the dividend, the stock price gradually recovers as investors optimistic about the company’s prospects push the price back to pre-dividend levels. This indicates market confidence in the company’s growth.

Bonus Issue: After the dividend, the stock price remains depressed and does not recover to pre-dividend levels. This usually reflects investor doubts about the company’s outlook, possibly due to poor performance or changing market conditions.

Using the earlier example, if the stock price rises from $31 back to $35, that’s a rights issue; if it stays below $31, it’s a bonus issue.

This difference directly influences whether buying the day before the ex-dividend date is worthwhile—only high-quality companies capable of completing the price recovery are worth considering before the ex-dividend date.

Hidden Costs: Taxes and Transaction Fees

Investors often overestimate dividend income but underestimate hidden costs.

Tax issues depend on account type. Holding stocks in tax-deferred accounts (like IRA, 401K) means no dividend tax worries. But in regular taxable accounts, even if the stock price drops, investors still need to pay tax on the received dividends—resulting in a double loss.

For example: An investor buys at $35, and on the ex-dividend date, the price drops to $31. The unrealized loss is $4, but they still owe tax on the $4 dividend.

Transaction fees and trading taxes vary by market. In Taiwan’s stock market:

• Buying/selling fee = stock price × 0.1425% × discount rate (usually 50-60%)
• Trading tax: 0.3% for ordinary stocks, 0.1% for ETFs

Though these costs seem small, they can accumulate and erode returns over time.

How to Capture Opportunities Amid Ex-Dividend Fluctuations

Long-term investors find stable dividend income most attractive. But short-term traders aiming to profit from price swings around dividends need more flexible tools.

Some consider using derivatives (like CFDs) to control large positions with smaller capital, and to go long or short based on price movements. These instruments allow avoiding dividend taxes without holding actual shares, with relatively low trading barriers.

However, derivatives involve leverage risks, so it’s essential to assess your risk tolerance carefully.

Comprehensive Considerations for Investment Decisions

Whether buying the day before the ex-dividend date is worthwhile has no absolute answer. Investors should consider:

• Has the stock price already risen excessively before the ex-dividend date?
• Does the company have a history of completing price recoveries (fill rights)?
• What are the company’s fundamentals and industry outlook?
• What is your tax situation and intended holding period?
• How do hidden costs impact your actual returns?

High-dividend stocks are fundamentally suited for long-term allocation; short-term price fluctuations are just noise. True investment advantage comes from assessing company quality and exercising patience, not from trying to precisely time buy/sell around ex-dividend days.

Rational investors should ask not “When to buy,” but “Should I buy this company at all.”