Sell after the dividend payout or hold? The truth about high-dividend stocks

Many investors have mixed feelings about high-dividend stocks. On one hand, stable dividend payouts indeed indicate a solid business model and ample cash flow, which is why value investing masters like Warren Buffett favor such stocks. On the other hand, investors are often troubled by a core question: 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 lock in gains?

Is the stock price drop on the ex-dividend date truly “destined”?

Theoretical logic of the decline

From a technical perspective, the stock price decline on the ex-dividend date has a theoretical basis. When a company pays out cash dividends, this cash flows out of the company’s assets, so the company’s net assets represented by the stock also decrease accordingly. Based on this logic, the stock price should adjust downward.

For example, consider a company with stable annual earnings of $3 per share, valued at a P/E ratio of 10, which implies a stock price of $30. The company has accumulated cash reserves over the years, including an excess cash of $5 per share. At this point, the total valuation per share is $35. If the company decides to distribute a special dividend of $4 per share, retaining $1 per share as reserve, theoretically, the ex-dividend date stock price should adjust from $35 to $31.

In the case of stock splits, the calculation is more complex, using the formula: Post-split stock price = (Pre-split stock price - Split price) / (1 + Split ratio)

For example, if a stock is priced at $10, with a split price of $5, and a split ratio of 2:1, then the post-split price = (10 - 5) / (2 + 1) ≈ $1.67.

Reality often defies theory

However, there’s a key twist: Historical data shows that the stock price does not necessarily fall on the ex-dividend date. Stock price movements are influenced by many factors, including market sentiment, company performance, and macroeconomic conditions.

Take Coca-Cola as an example. The company has decades of stable dividend history, paying quarterly. On most ex-dividend dates, its stock price slightly declines, but on the ex-dividend dates of September 14 and November 30, 2023, the stock actually rose slightly.

Apple’s performance is even more unique. In recent years, due to continued enthusiasm for tech stocks, Apple often rises against the trend on ex-dividend dates. On November 10, 2023, the stock price increased from $182 to $186 on the ex-dividend date; on May 12, the stock rose by 6.18%.

Industry leaders like Walmart, PepsiCo, Johnson & Johnson also often see stock price increases on ex-dividend dates. This indicates that company fundamentals, market expectations, and industry cycles often have a greater impact on stock prices than the dividend itself.

Is buying after the ex-dividend date really cost-effective?

To answer this, two key concepts must be understood:

Ex-dividend vs. Ex-Right

• Ex-rights and dividends (“填權息”): After the ex-rights and ex-dividend date, the stock price temporarily drops, but then, driven by investor optimism about the company’s prospects, the stock price gradually recovers to or near the pre-ex-dividend level. This indicates market confidence in the company’s future growth.

• Ex-rights and dividends (“貼權息”): After the ex-dividend date, the stock price remains sluggish and fails to recover to pre-ex-dividend levels. This usually reflects investor concerns about the company’s future performance, possibly due to weak earnings or deteriorating market conditions.

Three decision perspectives

(1) Stock price performance before the ex-rights and ex-dividend date

If the stock price has already risen to a high level before the ex-dividend date, many investors may take profits early, especially those seeking to avoid taxes. At this point, the stock price may already include excessive expectations or face selling pressure. Therefore, buying at this time is not the best strategy; selling after the ex-dividend date might even lead to losses.

(2) Historical patterns of stock price movement after the ex-dividend date

Historically, stocks tend to decline more often after the ex-dividend date. This is not friendly to short-term traders. However, if the stock price continues to fall to a technical support level and shows signs of stabilization, it might be a good buying opportunity. From this perspective, selling after the ex-dividend date can help avoid subsequent declines.

(3) Company fundamentals and long-term holding perspective

For solid, industry-leading companies, dividends are more of a price adjustment process rather than a reduction in value. Instead, they provide investors with an opportunity to acquire quality assets at a more favorable price. In such cases, buying after the ex-dividend date and holding long-term is often more cost-effective because the company’s intrinsic value remains unchanged, and the price correction increases attractiveness.

Hidden costs to watch out for when participating in ex-rights and dividends

Tax on dividends

If you buy ex-dividend stocks in a deferred tax account (like IRA or 401K), usually you don’t need to worry about taxes. But in a regular taxable account, it’s different. If an investor buys at $35 per share before the ex-dividend date, and the stock drops to $31 on the ex-dividend date, they face unrealized capital loss and must pay tax on the $4 dividend received.

If you plan to reinvest dividends and expect the stock price to recover quickly, buying before the ex-dividend date makes sense. Otherwise, selling after the ex-dividend date might be wiser.

Transaction fees and taxes

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

Transaction tax varies by security type:

• Ordinary stocks: 0.3%
• ETFs: 0.1%

The tax is calculated as: stock price × applicable tax rate

These costs can significantly erode short-term trading gains. If adopting a strategy of selling after the ex-dividend date, it’s important to calculate whether these costs offset the dividend income.

Rational framework for investment decisions

Overall, the performance of dividend-paying stocks before and after the ex-dividend date is influenced by many factors. Investors should not be misled by the myth that “stocks must fall on the ex-dividend date,” but should make decisions based on:

• Whether the company’s fundamentals are still improving
• Historical fill-rights/attach-rights ratios
• Personal tax situations and transaction costs
• Whether pursuing short-term volatility gains or long-term stable dividends
• Personal risk tolerance

The key is that the dividend itself does not determine the stock’s value; market expectations of the company’s future are the core. Whether selling after the ex-dividend date is profitable depends on whether your purchase price relative to the company’s actual value is sufficiently low.