Stock price battles around the ex-dividend date: When is the best time to enter for maximum benefit?

Many investors know that stable dividend-paying listed companies often represent solid business models and ample cash flow. Warren Buffett himself has allocated over 50% of his assets into high-dividend stocks, which proves the investment value of such stocks. However, for beginners new to dividend stocks, the biggest confusion often revolves around two questions: Does the stock price necessarily drop on the ex-dividend date? When is the best time to enter—the ex-dividend date or after?

Stock Price Usually Does Not Drop on the Ex-Dividend Date

Many people instinctively believe that stock prices will definitely fall on the ex-dividend date, but in reality, this is not an inevitable phenomenon. Historical data shows that industry leaders often experience price increases on the ex-dividend date.

Theoretically, the stock price should adjust as follows after the ex-dividend:

When a company distributes cash dividends to shareholders, it effectively reduces the company’s assets. Suppose a company’s stock price before the ex-dividend date is $35 per share, which includes $5 in cash reserves per share. If the company decides to pay a special dividend of $4 per share, the stock price should theoretically adjust to $31 on the ex-dividend date.

However, in actual practice, stock price movements are influenced by many factors—market sentiment, company performance, industry outlook, overall economic environment—all exerting impact simultaneously. Take Coca-Cola as an example: although it pays stable quarterly dividends, its stock price on the ex-dividend date is not always down. On September 14 and November 30, 2023, Coca-Cola’s stock actually rose slightly on the ex-dividend date; similarly, Apple Inc. on November 10, 2023, saw its stock price increase from $182 to $186, a 2.2% gain on the ex-dividend date.

Understanding Fill-Right and贴权息 (Price Rebound and贴权息): Key to Stock Price Trends

The stock price performance after the ex-dividend date determines the actual return on investment, leading to two important concepts:

Fill-Right (填權息): After the stock goes ex-dividend, the price may temporarily decline but then gradually recovers to the pre-dividend level or close to it. This reflects investors’ optimistic outlook on the company’s prospects.

贴权息 (贴权息): The stock price remains sluggish after the ex-dividend date and fails to rebound to the pre-dividend level. This usually indicates market concerns about the company’s fundamentals.

Practical Strategy: Buy Before and Sell After the Ex-Dividend Date

Many savvy investors adopt this approach to capitalize on the volatility around the ex-dividend date:

Positioning Before the Ex-Dividend Date: Some investors enter positions ahead of the ex-dividend date, expecting stock prices to rise during the dividend announcement and ex-dividend period. Especially when the stock price has not fully reflected the dividend expectation, early positioning can secure a better cost basis.

Observing on the Ex-Dividend Day: The key is to observe whether the stock price adjusts as expected on the ex-dividend date. If the decline is less than the dividend amount or even if the stock rises, it indicates market confidence in the company’s outlook.

Post-Ex-Dividend Strategy: After confirming the fill-right trend, some investors choose to take profits by selling at a higher price. For short-term traders, this is often the ideal time to close positions and lock in gains.

Three Key Factors to Decide When to Buy or Sell

(1) Stock Price Performance Before the Ex-Dividend Date: If the stock has already surged significantly before the dividend announcement, it suggests the good news has been fully priced in. Buying at this point carries higher risk due to potential selling pressure on the ex-dividend date. Conversely, if the stock price remains stable or even dips, entering before the ex-dividend date may be advantageous.

(2) Historical Fill-Right Speed: Review the stock’s past ex-dividend performance. If it typically recovers quickly (within 1-2 weeks), there may be limited opportunity to add after the ex-dividend date. If recovery is slow or the stock remains below the pre-dividend level, there could be better buying opportunities post-dividend.

(3) Company Fundamentals Stability: For leading companies with solid business models and strong cash flow, the ex-dividend adjustment is mainly a technical correction, with intrinsic value unchanged. Such stocks, even if bought after the ex-dividend date and held long-term, are often wise investments, as future earnings growth can drive price recovery.

Transaction Costs Cannot Be Ignored

When trading ex-dividend stocks, investors should consider several hidden costs:

Dividend Taxation: In taxable accounts, dividends are taxed. For example, if you buy at $35 before the ex-dividend date and receive $4 in dividends, and the stock drops to $31 on the ex-dividend date, you face an unrealized capital loss and must pay tax on the dividend.

Trading Fees and Taxes: In Taiwan’s stock market, the trading fee is calculated as stock price × 0.1425% × broker discount rate (usually 50-60%). The selling tax is 0.3% for regular stocks or 0.1% for ETFs. Although these costs seem small, frequent trading can gradually eat into profits.

Summary Points

The stock price behavior before and after the ex-dividend date is not solely determined by the dividend amount but is influenced by overall market conditions, investor expectations, and company fundamentals. The strategy of buying before and selling after the ex-dividend date relies on accurately judging the fill-right speed and market sentiment.

For long-term investors, high-dividend stocks with solid fundamentals are worth considering at any time. For short-term traders, precise timing around technical fluctuations is essential, along with reserving capital to cover transaction costs. Ultimately, regardless of when you choose to enter, decisions should be based on your risk tolerance and investment goals.