Buy before the dividend payout or after? An article explaining those hidden costs

Why Are High-Dividend Stocks So Popular?

Stable dividend payouts often indicate a solid business model and ample cash flow. That’s also why Warren Buffett favors high-dividend stocks—more than 50% of his assets are allocated to such shares.

In recent years, more investors are treating high-dividend stocks as core holdings. But beginners often get stuck on two questions: Will the stock price definitely fall on the ex-dividend date? Should I buy before or after the ex-dividend date?

Is a Price Drop on the Ex-Dividend Date Really Unavoidable?

Theoretically, the stock price should drop on the ex-dividend date. This is because paying out cash dividends means the company’s assets decrease, so the stock price is expected to adjust downward accordingly.

But in actual historical performance, this decline is not necessarily guaranteed. Especially for industry leaders with stable earnings and high investor demand, the stock price may even rise on the ex-dividend date.

Why is this happening?

Let’s first clarify how dividends impact stock prices.

Suppose a company earns $3 per share annually, with a P/E ratio of 10, making the stock price $30. Over the years, the company has accumulated $5 per share in cash reserves. At this point, the total valuation is $35 per share.

Now, the company decides to distribute a special dividend of $4 per share, keeping only $1 per share as an emergency reserve.

The record date is set for June 15, with dividends paid on June 17, usually on the same day as the ex-dividend date. Theoretically, the stock price should drop from $35 to $31 ($35 - $4).

However, in reality, stock prices on the ex-dividend date can rise or fall. This is because stock price movements are influenced by many factors—market sentiment, company performance, industry outlook, etc., not just the dividend payout.

Look at real cases

Take Coca-Cola as an example. The company has a long history of paying dividends, with stable quarterly payments in recent years. On most ex-dividend dates, the stock price dips slightly, but sometimes it rises modestly. In September and November 2023, Coca-Cola’s stock saw small increases on ex-dividend dates.

Apple is even more interesting. Due to recent enthusiasm for tech stocks, Apple often sees significant gains on ex-dividend dates. On November 10, 2023, Apple’s stock rose from $182 to $186. On the ex-dividend date of May 12, this increase was as much as 6.18%.

Industry leaders like Walmart, Pepsi, and Johnson & Johnson also frequently see stock price increases on ex-dividend dates.

Overall, the size of the dividend, market sentiment, company performance, and other factors all influence stock price movements on the ex-dividend date.

Should You Buy Before or After the Ex-Dividend Date? The Key Is These Three Points

There’s no absolute answer; it depends on the specific situation.

Concept 1: Fill-Right vs. Stick-Right

Before deciding, you need to understand two concepts.

Fill-Right (填权息): After the stock goes ex-dividend, the price temporarily drops but then gradually recovers, eventually returning to or near the pre-dividend level. This indicates investors are optimistic about the company’s future prospects.

Stick-Right (贴权息): After the ex-dividend date, the stock price remains sluggish and does not recover to the pre-dividend level. This usually suggests investors have concerns about the company’s future performance, possibly due to poor earnings or market environment changes.

Three Decision Dimensions

Dimension 1: Stock Price Performance Before the Ex-Dividend Date

If the stock price has already surged to a high level before the ex-dividend date, many investors may choose to take profits early. Entering at this point might not be wise, as the price may already reflect excessive expectations or face selling pressure from profit-takers.

Dimension 2: Historical Trends

Statistically, stocks tend to decline more often than rise after the ex-dividend date. This poses higher risks for short-term traders. However, if the stock stabilizes after hitting technical support levels, it could present a good buying opportunity.

Dimension 3: Company Fundamentals and Holding Period

This is the most critical factor. For solid companies with industry-leading positions, the ex-dividend adjustment is just part of normal price movement, not a sign of value loss. It may even provide an opportunity to buy quality assets at a better price.

If you plan to hold long-term, buying after the ex-dividend date is often more cost-effective—since the intrinsic value remains unchanged, and the price decline makes the stock more attractive for dividend income.

Don’t Overlook Hidden Costs

Cost 1: Dividend Tax

If you buy high-dividend stocks in a qualified account (like a US IRA or 401K), you don’t pay taxes on the dividends before withdrawal.

But if you use a regular taxable account, things get complicated. For example, buying at $35 before the ex-dividend date, and the price drops to $31 on the ex-dividend date, you face an unrealized capital loss while also owing taxes on the $4 dividend.

However, if you plan to reinvest dividends and believe the stock price will recover quickly, buying before the ex-dividend date can make sense.

Cost 2: Transaction Fees and Taxes

In Taiwan’s stock market, transaction fees are calculated as: Stock Price × 0.1425% × brokerage discount rate (usually 50-60%)

Tax rates vary by stock type:

• Common stocks: 0.3%
• ETFs: 0.1%

These costs may seem small, but frequent trading can add up over time.

Core Advice

Regarding whether to buy before or after the ex-dividend date, the most important thing is your investment horizon and company quality:

• Short-term traders: While there may be volatility around the ex-dividend date, consider tax costs and transaction fees. High-frequency trading might not be worth it.

• Long-term value investors: Focus on fundamentally strong companies. Buying after the price dips can allow you to acquire stable dividends at a better price. The probability of fill-right is higher, leading to more stable long-term returns.

• General investors: Instead of obsessing over timing around the ex-dividend date, devote more effort to analyzing company fundamentals and assessing your risk tolerance. Good companies bought at any time and held long-term usually won’t lead to losses.

Whatever your timing choice, remember to invest within your means and align your strategy with your risk capacity.