Is it necessary to time the purchase on the ex-dividend date? Is a stock price decline normal or an exception?

Stock dividends and distributions have always been an important indicator of a listed company’s operational quality. Companies that can consistently and stably distribute cash to shareholders usually represent a solid business model with ample cash flow. Many long-term outstanding listed companies adhere to the tradition of regular dividends, and Warren Buffett himself places great importance on such assets, with over 50% of his holdings allocated to high-dividend stocks.

However, novice investors entering the dividend stock arena often struggle with two core questions: Will the stock price definitely fall on the ex-dividend date? Is it really a bargain to buy on the ex-dividend date?

Stock Price on the Ex-Dividend Date: Drop is Common but Not Inevitable

Theoretically, there is a logical basis for the stock price to decline on the ex-dividend date. When a company distributes cash dividends, this money effectively flows out of the company’s assets, so the net asset value per share represented by the stock should decrease accordingly, and the stock price should adjust downward.

But looking at actual market performance, a decline in stock price on the ex-dividend date is not necessarily a given. Especially for stable, industry-leading giants, the stock price often rises on the ex-dividend day.

Mechanism of How Dividends Affect Stock Price:

In an ex-dividend scenario, the company distributes cash dividends to shareholders, which directly reduces the company’s cash reserves. While shareholders receive cash income, the company’s overall value per share indeed decreases.

For example: Suppose a company earns $3 per share annually, valued at a 10x P/E ratio, so the stock price is $30. The company has accumulated $5 per share in cash reserves, raising its total valuation to $35.

If the company decides to pay a $4 cash dividend per share (retaining $1 as reserve), with the ex-dividend date set for June 15, and the ex-dividend rule is executed according to exchange regulations. Theoretically, on the ex-dividend date, the stock should adjust from $35 to $31.

Calculations in the case of stock issuance:

Post-issuance stock price = (Original Price - Issue Price) / (Original Ratio + New Ratio)

Example: A stock priced at 10 yuan, with a rights issue price of 5 yuan, and a ratio of 2 old shares to 1 new share, then the post-issue price = (10-5) / (2+1) = 1.67 yuan.

But reality often surprises:

Although the decline in stock price on the ex-dividend date makes sense theoretically, market performance often defies this expectation. Take Coca-Cola as an example, which pays quarterly dividends. In 2023, on two ex-dividend rights days (September 14 and November 30), the stock saw slight increases, while at other times, it declined.

Apple’s performance is even more notable. As a quarterly dividend-paying tech giant, due to strong tech stock popularity, on November 10, 2023, the ex-dividend rights day, its stock rose from $182 to $186, a 2.2% increase. On May 12, 2023, the same day, the increase was as high as 6.18%.

Industry staples like Walmart, Pepsi, Johnson & Johnson also often see gains on ex-dividend days.

Stock price movements depend on multiple factors: dividend amount, overall market sentiment, company performance expectations, etc. No single factor determines the direction.

Three-Dimensional Evaluation of Buying on the Ex-Dividend Date

Deciding whether to buy on the ex-dividend date requires analysis from three perspectives:

1. Stock price trend before the ex-dividend date

If the stock has already surged significantly before the dividend announcement to a high level, many investors prefer to lock in gains early, especially those seeking to avoid dividend taxes. Buying at this point faces greater selling pressure, and may not be very cost-effective because the stock price already includes excessive expectations.

Conversely, if the stock performs steadily or even adjusts downward before the ex-dividend date, the decline on the day may create a buying opportunity.

2. Historical record of rights issue/price adjustment

This is a key indicator for evaluating whether buying on the ex-dividend date is worthwhile.

Rights issue (填權息) refers to the stock gradually recovering its price after the ex-dividend date due to positive fundamentals, eventually returning to or near pre-dividend levels, indicating investor optimism about the company’s prospects.

Price discount (貼權息) indicates that after the ex-dividend date, the stock remains sluggish and fails to recover to pre-dividend levels, often reflecting investor concerns about future performance.

Using the earlier example of a $35 stock, if after the ex-dividend date it rises from $31 back to $35, it completes a rights issue; if it remains below $35, it is a discount scenario.

Historically, stocks tend to decline more often than rise after dividends, which is unfavorable for short-term traders. However, if the stock price falls to a technical support level and stabilizes, it can become a good entry point.

3. Company fundamentals and investment horizon

This is the fundamental basis for whether buying on the ex-dividend date is wise.

For companies with solid fundamentals and leading industry positions, dividends are more of a technical adjustment rather than a value destruction. For such companies, buying after the ex-dividend date and holding long-term is often more profitable, because intrinsic value remains intact, and the price correction may offer a chance to acquire quality assets at a better price.

In contrast, companies with mediocre performance or unstable industry positions carry higher risks when buying on the ex-dividend date.

Hidden Costs of Participating in Dividend Stocks

Tax burden on dividends:

Using tax-deferred accounts (like the US IRA or 401K) to buy dividend stocks can temporarily avoid tax burdens. But in taxable accounts, the situation is different.

If an investor buys at $35 before the ex-dividend date, and the stock drops to $31 on the ex-dividend date, the investor faces an unrealized loss of $4 and must pay taxes on the $4 dividend received, making the tax cost significant.

However, if the investor plans to reinvest dividends and expects the stock price to recover quickly, buying before the ex-dividend date may still be reasonable.

Transaction fees and taxes:

In Taiwan’s stock market, buying and selling stocks incurs brokerage fees and transaction taxes.

Brokerage fee calculation: Stock price × 0.1425% × brokerage discount rate (usually 50-60%)

Transaction tax varies by stock type:

• Ordinary stocks: 0.3%
• ETFs: 0.1%

While these costs seem small per transaction, frequent buying on ex-dividend days can accumulate into substantial costs.

Decision Framework for Buying on the Ex-Dividend Date

Considering all factors, whether buying on the ex-dividend date is wise depends on:

First, whether the stock has already risen sufficiently before the ex-dividend announcement. If it’s at a high, avoid chasing the peak.

Second, the company’s historical record of rights adjustments. Better records make buying on the ex-dividend date more meaningful.

Third, the investor’s holding period. Long-term holding of quality companies makes buying after the ex-dividend date more advantageous; short-term traders should be cautious, as dividends tend to be followed by more declines statistically.

Fourth, comprehensive assessment of taxes and transaction costs. Frequent trading erodes returns.

For companies with solid fundamentals and stable long-term dividends, buying on the ex-dividend date and holding long-term often yields a better risk-reward ratio. The key is to select the right companies and be psychologically prepared for short-term price fluctuations.