Do high-dividend stocks' prices fall after ex-dividend? When should investors enter the market?

Why Do Dividends and Distributions Attract Investors?

Consistent and stable dividends and distributions often reflect a company’s solid business model and healthy cash flow. Many long-term outperforming listed companies have established a tradition of regular dividends, which is why high-dividend stocks are increasingly favored by investors. Even “Stock Mogul” Warren Buffett is particularly fond of these stocks, allocating over 50% of his assets to high-dividend stocks.

However, for novice investors just starting to explore dividend stocks, the ex-dividend mechanism can be confusing: Will the stock price definitely drop on the ex-dividend date? Should I buy before or after the ex-dividend date?

Stock Price Changes on the Ex-Dividend Rights Date: A Drop Is Not Inevitable

In theory, on the ex-dividend rights date, shareholders have already received the dividend rights, and the stock’s value should decrease accordingly, leading to a drop in stock price. But historically, a decline on the ex-dividend rights date is not guaranteed. Especially for leading companies with stable dividends, excellent performance, and strong market appeal, stock prices can even rise on the ex-dividend date.

How Ex-Dividend and Ex-Rights Affect Stock Prices

In the case of ex-rights, when a company issues new shares or bonus shares, increasing the total share capital, the overall value remains unchanged, but the value per share decreases, causing the stock price to adjust downward.

In the case of dividends, paying out cash dividends means assets are actually reduced. While shareholders receive cash income, the stock price typically decreases accordingly.

Specific Calculation Examples

Suppose a company’s annual earnings per share are $3, and based on a market P/E ratio of 10, the stock’s value is $30. The company’s accumulated cash reserves amount to $5 per share, making the total valuation $35 per share.

If the company decides to distribute a special dividend of $4 per share, keeping only $1 per share as emergency funds, then on the ex-dividend date, the theoretical stock price should be $35 minus $4, i.e., $31 per share.

In the case of rights issues, the theoretical price calculation formula is: Post-rights issue stock price = (Pre-rights issue stock price - Rights issue price) / (1 + Rights issue ratio)

For example, if a company’s pre-rights issue price is $10 per share, with a rights issue price of $5 per share, and a ratio of 2 new shares for 1 old share, then: Post-rights issue price = ($10 - $5) / (1 + 1) = approximately $2.50

( Historical Performance Shows Exceptions

Although declines on the ex-dividend date are common, they are not absolute rules. Stock price movements are influenced by market sentiment, company performance, and other factors, not solely by the ex-rights and ex-dividend mechanism.

Take Coca-Cola as an example, which pays stable quarterly dividends. In most cases, its stock price dips slightly on the ex-dividend date, but on September 14, 2023, and November 30, 2023, the stock price actually rose slightly.

Apple Inc. shows even more pronounced effects. Due to high market demand for tech stocks, Apple often sees gains on the ex-dividend date. For instance, on November 10, 2023, the stock price rose from $182 to $186 on the ex-dividend date, and on May 12, it increased by 6.18%.

Industry leaders like Walmart, Pepsi, and Johnson & Johnson also frequently see stock price increases on ex-dividend dates.

The Hidden Costs Before and After the Ex-Dividend Date Cannot Be Ignored

Before devising a buying strategy around the ex-dividend date, investors must understand the associated cost structure.

( Tax Implications

If purchasing ex-dividend stocks through tax-advantaged accounts (such as the US IRA or 401K), no taxes are payable until funds are withdrawn.

However, if using a regular taxable account, buying at $35 per share before the ex-dividend date, and the stock drops to $31 on the ex-dividend date, results in an unrealized capital loss, and the investor must pay taxes on the $4 dividend.

) Transaction Fees and Trading Taxes

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

Trading taxes vary by stock type:

• Common stocks: 0.3%
• ETFs: 0.1%

The tax calculation is: Stock price × tax rate

These costs directly eat into investment returns, especially with frequent trading.

Is Buying After the Ex-Dividend Better?

This question requires a comprehensive view from multiple angles.

( Concepts of Fill-Right and Discount-Right

Fill-Right (填權息): After the stock goes ex-dividend, its price may temporarily decline, but as investors remain optimistic about the company’s prospects, the stock price gradually recovers to or near pre-dividend levels. This indicates market confidence in future growth.

Discount-Right (貼權息): After ex-dividend, the stock price remains depressed and fails to recover to pre-dividend levels. This usually reflects investor concerns about the company’s future performance, possibly due to poor earnings or changing market conditions.

Using the earlier example, if the stock price recovers from $31 to $35 after ex-dividend, it completes a fill-right; if it remains below $35, it is a discount-right.

) Three Decision Dimensions

(1) Stock Price Performance Before the Ex-Dividend Date: If the stock price has risen to a high before the ex-dividend date, many investors prefer to realize gains early, especially those seeking to avoid taxes. Entering the market at this point may not be wise, as the price may already include over-optimism or face selling pressure.

(2) Historical Trends: Data shows that stocks tend to decline after the ex-dividend date rather than rise, posing higher risks for short-term traders. However, if the stock continues to fall to a technical support level and stabilizes, it might be a good buying opportunity.

(3) Fundamental Analysis and Long-Term Holding: For companies with solid fundamentals and industry leadership, the ex-dividend adjustment is more of a valuation correction than a loss of value. It can even be an opportunity to acquire quality assets at a better price. Buying after the ex-dividend date and holding long-term is often a more economical strategy, as the intrinsic value remains intact or may even become more attractive due to price adjustments.

How Long After the Ex-Dividend Date Can You Sell? Timing the Exit

For investors aiming to profit from ex-dividend fluctuations, how long after the ex-dividend date to sell is a key question. Theoretically, there is no time limit, but strategic exit considerations include:

Short-term Trading: If the stock rebounds quickly after the ex-dividend date (usually within 1-3 weeks) and reaches your profit target, consider selling to lock in gains. Pay attention to whether technical support levels hold.

During Fill-Right Process: If the stock price is gradually filling the rights, you might sell near or before the ex-dividend date, monitoring the fill process closely.

Long-term Holding Strategy: If your goal is dividend income and capital appreciation, the timing of sale depends on company fundamentals or personal financial needs, not solely on the ex-dividend date.

Tax Considerations: In taxable accounts, holding period affects capital gains tax rates. Short-term holdings (less than one year) are taxed at higher rates, influencing your exit timing.

Overall Decision-Making Recommendations

Dividend stocks’ price behavior on the ex-dividend date is influenced by multiple factors, including dividend amount, market sentiment, company performance, and more. Investors should consider:

• Whether the company’s fundamentals are solid
• Past fill-right or discount-right performance
• Personal investment horizon and tax situation
• Transaction costs and fees
• Risk tolerance

Whether entering before or after the ex-dividend date, rational decisions should be based on a thorough understanding of mechanisms and costs, rather than following the crowd blindly.