Investment myths around stock ex-dividend dates: Is stock price decline inevitable?

The undervalued value of stable dividends

Long-term investors tracking publicly listed companies will notice an interesting phenomenon: those companies capable of consistently paying dividends over many years often have solid business models and healthy cash flows. In Buffett’s investment portfolio, more than half of the capital is allocated to high-dividend stocks, which is not a coincidence but a recognition of the long-term value of such enterprises.

In recent years, more investors are reevaluating the role of high-dividend stocks. They are no longer just seen as conservative investments but have become core holdings for many. However, new investors entering this field often get stuck on two core questions: Will stock prices definitely drop on the ex-dividend date? Should I buy before or after the ex-dividend date?

The truth about stock price adjustments on the ex-dividend date

Theoretically, stock prices should decline on the ex-dividend date due to cash outflows. But reality is far more complex than textbooks suggest.

Historical data shows that a decline in stock price on the ex-dividend date is not inevitable. Especially for stable, market-favored blue-chip stocks, the price may even appreciate on the ex-dividend date.

To understand this phenomenon, first, it’s important to grasp how ex-dividend impacts stock prices:

When a company distributes cash dividends, it’s akin to extracting funds from the company’s assets. Theoretically, this reduces the enterprise value per share. For example, if a stock trades at $35 before the ex-dividend date, including $5 in cash reserves, and the company decides to pay a special dividend of $4, then on the ex-dividend date, the stock price should adjust to $31.

However, in reality, stock price movements are influenced by multiple factors beyond just the dividend payout. Market sentiment, company performance, and the overall economic environment all jointly determine the stock price trend on the ex-dividend date.

Coca-Cola’s performance is quite illustrative. As a company with a long history of dividend payments, it generally experiences slight declines on ex-dividend dates. Yet, on September 14, 2023, and November 30, 2023, the stock actually rose slightly on the ex-dividend days. Apple’s case is even more striking—due to the recent popularity of tech stocks, on November 10, 2023, Apple’s stock price increased from $182 to $186 on the ex-dividend date, a 6.18% rise. Industry leaders like Walmart, Pepsi, and Johnson & Johnson also often show upward movements on ex-dividend days.

These cases point to a common conclusion: The amount of dividend, overall market sentiment, and the company’s fundamentals are key factors influencing stock price movements on the ex-dividend date.

Seizing opportunities in rights-claiming and discounting

Understanding two concepts is crucial for developing an ex-dividend date investment strategy:

Rights-claiming (填權息) refers to the phenomenon where, after the ex-dividend date, stock prices temporarily decline but then gradually recover to pre-dividend levels as investor optimism about the company’s prospects drives prices back up. This reflects market confidence in the company’s growth potential.

Discounting (貼權息) indicates that stock prices remain depressed after the ex-dividend date and fail to recover to pre-dividend levels. This usually signals investor concerns about the company’s future performance, possibly due to declining earnings or worsening market conditions.

When deciding whether to buy before or after the ex-dividend date, investors should evaluate from three dimensions:

First, observe the stock’s price trend before the ex-dividend date. If the price has already risen to a high level beforehand, many profit-taking investors might sell early to avoid taxes or lock in gains. In this case, new investors entering at that point may face selling pressure and it might not be the best timing.

Second, review the stock’s historical rights-claiming performance. Not all high-dividend stocks successfully fill rights. For short-term traders, the risk of price decline after the ex-dividend date is relatively high. However, if the price falls to a technical support level and stabilizes, it could be an undervalued buying opportunity.

Third, assess the company’s fundamental strength. For firms with a prominent industry position and solid fundamentals, the ex-dividend adjustment is merely a technical price correction rather than a real reduction in enterprise value. In such cases, the price decline offers long-term investors a chance to acquire quality assets at a better price.

Hidden costs often overlooked in ex-dividend investing

When evaluating whether buying on the ex-dividend date is worthwhile, many investors overlook costs beyond trading.

Tax considerations are primary. If purchasing dividend stocks within tax-advantaged accounts like IRAs or 401Ks, taxes are deferred until withdrawal. But in regular taxable accounts, it’s different. Using the earlier example of buying at $35 and receiving $4 in dividends with a $31 ex-price, investors face unrealized capital losses and must pay taxes on the $4 dividend income, significantly reducing net returns.

Transaction fees are the second layer of costs. For example, in Taiwan’s stock market, the commission fee is calculated as stock price multiplied by 0.1425%, then multiplied by the broker’s discount rate (usually 50-60%). Transaction tax varies by stock type—0.3% for ordinary stocks and 0.1% for ETFs. These costs may seem small but can eat into profits over multiple trades.

Frequent traders in ex-dividend stocks need to be aware of these hidden costs to make rational decisions.

Practical framework for investment decisions

Based on the above analysis, investment decisions on the ex-dividend date should follow this logic:

For investors holding high-quality stocks, the ex-dividend itself is not a reason to sell. On the contrary, it may present a low-price accumulation opportunity, especially if rights-claiming occurs successfully, leading to substantial long-term returns.

For short-term traders, caution is essential. High prices before the ex-dividend date and selling pressure afterward increase the risk of losses. Only when the price falls to a clear support level and shows signs of reversal is it a relatively safe entry point.

Regardless of the strategy, investors should tailor their plans according to their investment goals, risk tolerance, and time horizon, rather than blindly following trends or being swayed by short-term volatility. Opportunities in ex-dividend investing do exist; the key is to identify and seize them correctly.