The operation logic of buying heavily before the dividend and selling heavily after the dividend: capturing stock price fluctuations to earn short-term profits

Many investors, when engaging with dividend-paying stocks, are often troubled by a paradoxical phenomenon—why do stock prices experience significant fluctuations around the ex-dividend date? How can one profit from these fluctuations? In fact, the strategy of “buying heavily before the ex-dividend date and selling after” has an underlying market logic. Understanding this logic is crucial for short-term traders.

The Theoretical Basis of Stock Price Fluctuations on the Ex-Dividend Date

First, it must be clarified that a decline in stock price on the ex-dividend date is not inevitable, but price volatility is indeed certain.

From a technical perspective, when the ex-dividend date arrives, the company distributes cash dividends to shareholders, which means the company’s assets are actually reduced. Theoretically, if a company’s stock is valued at $35 per share before the dividend, and it pays a $4 cash dividend per share, then after the ex-dividend date, the stock’s theoretical value should adjust to $31.

However, based on historical market performance, stock price movements are not solely influenced by the dividend distribution. Market sentiment, company performance, investor expectations, and other factors all play a role, leading to the possibility of both price drops and rises on the ex-dividend date. For example, Coca-Cola in multiple ex-dividend dates in 2023 saw slight increases, while Apple on November 10, 2023, saw its price rise from $182 to $186, a notable increase.

The Logic Behind “Buy Heavy Before the Ex-Dividend and Sell Heavy After”

The core of this strategy is to capture market psychology changes during the following three phases:

Phase 1: Buying Motivation Before the Ex-Dividend Date

In the weeks following the ex-dividend date declaration, investors—especially those seeking dividends—actively build positions, pushing the stock price higher. At this stage, the stock price often remains relatively high, sometimes reflecting an early digestion of dividend expectations. Additionally, some investors may establish positions before the ex-dividend date to avoid personal income tax burdens.

Phase 2: Price Adjustment Around the Ex-Dividend Date

As the ex-dividend date approaches, some profit-taking investors start to close their positions early; simultaneously, investors who wish to hold the stock after the dividend are gradually entering. This causes significant volatility around the ex-dividend date. Historical data shows that stocks tend to decline more often than rise after the ex-dividend date, creating opportunities for short-term traders to short or reduce holdings.

Phase 3: Selling After the Ex-Dividend Date

Once the dividend distribution is complete, stock prices usually undergo a correction period. If the price falls to a technical support level and stabilizes, this often becomes the best window for “big selling” (reducing or closing positions). Investors can then exit based on their profit targets.

Key Decision Factors: Price Rebound (Fill the Rights) vs. Price Drop (Stick to the Rights)

To make the “buy before the ex-dividend and sell after” approach more effective, investors need to determine which category the target stock falls into:

Fill the Rights (填權息) refers to stocks that, after the ex-dividend, gradually recover to pre-dividend levels due to investor confidence in the company’s fundamentals. These are usually industry leaders like Walmart, PepsiCo, Johnson & Johnson, etc. For such stocks, the decline after the ex-dividend is typically small and quickly recovered.

Stick to the Rights (貼權息) refers to stocks that remain weak after the ex-dividend, failing to return to pre-dividend levels. This often indicates pessimism about the company’s prospects or changes in market conditions. For these stocks, short-term selling carries higher risk.

Therefore, the “buy before the ex-dividend and sell after” strategy is most suitable for high-quality companies with a high probability of fill-the-rights phenomenon.

Costs That Cannot Be Ignored

When implementing this strategy, investors should consider two main types of costs:

Dividend Tax Burden

If purchasing ex-dividend stocks in a regular taxable account, investors face not only unrealized capital losses from the stock price decline but also tax on the received cash dividends. For example, buying at $35 before the ex-dividend date, and the price drops to $31 on the ex-dividend date, results in a $4 paper loss, plus taxes on the $4 dividend. This double burden can significantly erode short-term profits.

Using tax-advantaged accounts like IRAs or 401(k)s can effectively mitigate this issue.

Transaction Costs and Taxes

Transaction costs include brokerage fees and transaction taxes. For example, in Taiwan’s stock market, the trading fee is calculated as: stock price × 0.1425% × discount rate (usually 50-60%). When selling, a transaction tax of 0.3% applies for regular stocks, and 0.1% for ETFs.

These seemingly small costs can accumulate with frequent trading, directly reducing short-term trading gains.

Practical Recommendations

For investors wishing to implement the “buy before the ex-dividend and sell after” strategy:

1. Select Targets Carefully: Prioritize companies with stable dividend records and strong industry positions, as they are more likely to experience fill-the-rights phenomena.

2. Understand Tax Structures: Evaluate your account type and choose the most tax-efficient accounts for trading.

3. Calculate Net Profits: Before executing trades, clearly estimate net gains after accounting for transaction fees, taxes, and dividends to ensure profitability.

4. Set Stop-Loss Levels: When prices decline after the ex-dividend, set clear stop-loss points based on technical and fundamental analysis to avoid being trapped.

5. Combine Short and Long Strategies: For fundamentally strong companies, even if short-term trades fail, holding some positions to benefit from long-term dividends can reduce overall risk.

Overall, the “buy heavily before the ex-dividend and sell heavily after” approach is not foolproof. Its success depends on a deep understanding of market psychology, cost factors, and individual stock characteristics. Investors should carefully assess their risk tolerance and market conditions before adopting this strategy.