Will the stock price definitely drop on the ex-dividend date? Understanding the meaning of the ex-dividend date is essential to seize investment opportunities.

When it comes to high-dividend stocks, many people’s first thought is “Stock Mogul” Warren Buffett. This legendary investor has over 50% of his assets allocated to high-dividend stocks, demonstrating his dedication to stable dividend-paying companies. Many investors are also starting to follow suit, making high-dividend stocks a core part of their asset allocation.

But once the ex-dividend date approaches, novice investors are often troubled by two questions: Will the stock price definitely fall on the ex-dividend date? What exactly does the ex-dividend date mean? How should I choose the right entry timing?

What Does the Ex-Dividend Date Mean? Is a Price Drop Inevitable?

First, it’s important to understand that the ex-dividend date is the official date when a company stops giving out dividends. On this day, shareholders who hold the stock are entitled to receive the cash dividend, while those who buy after this date are not eligible for this dividend.

Theoretically, since cash flows out of the company, the stock price should decrease. But the key point is: a price drop on the ex-dividend date is not necessarily guaranteed.

This is because stock prices are influenced by multiple factors. For example, Coca-Cola, a company with a long history of paying dividends, saw its stock price slightly rise on the ex-dividend dates of September 14 and November 30, 2023, rather than fall as expected. Even more striking was Apple—on the November 10, 2023 ex-dividend date, its stock price rose from $182 to $186, an increase of over 4%.

The difference between theoretical price and actual price lies here. Suppose a company earns $3 per share annually, with a P/E ratio of 10, then the theoretical stock price is $30. If the company has accumulated an excess cash of $5 per share, the total valuation becomes $35. After declaring a $4 dividend per share, the theoretical price should drop from $35 to $31.

But in reality, things often differ—investors’ optimism about the company’s prospects, overall market sentiment, and company performance can push the stock price back up or even higher.

How to Calculate Stock Dilution and Share Repurchase

If the company involves a share issuance rather than a dividend payout, the calculation becomes more complex. The formula is:

Post-issuance stock price = (Pre-issuance stock price - Issue price) / (1 + Issue ratio)

For example, if the original stock price is $10, the issue price is $5, and the ratio is 2:1 (2 shares for 1 new share), then the post-issue price ≈ ($10 - $5) / (2 + 1) ≈ $1.67.

Is Buying Stocks on the Ex-Dividend Date Worth It? Is It a Good Deal?

This is the real concern for investors. Two key concepts need to be understood:

Ex-rights (填權): The stock price gradually recovers after the ex-dividend date, eventually returning to pre-dividend levels. This indicates investor confidence in the company’s future.

Ex-duties (貼權): The stock price remains sluggish and fails to recover, often reflecting concerns about the company’s performance or market conditions.

Whether buying on the ex-dividend date is worthwhile mainly depends on three factors:

1. Stock price trend before the ex-dividend date
If the stock price has already risen significantly before the ex-dividend date, many investors may choose to take profits early, especially to avoid high taxes. Entering at this point might face substantial selling pressure and may not be the best timing.

2. Historical performance after dividends
Data shows that stocks tend to decline rather than rise after the ex-dividend date. For short-term traders, buying then risks incurring losses. However, if the stock price falls to a technical support level and shows signs of stabilization, it could be a good entry point.

3. Company fundamentals and holding period
For solid companies with industry-leading positions (like Walmart, Pepsi, Johnson & Johnson), the ex-dividend adjustment is more mechanical than a sign of value loss. On the contrary, it provides long-term investors with opportunities to buy quality assets at lower prices. Holding these stocks long-term, buying after the ex-dividend date is often more cost-effective.

Hidden Costs of Participating in Ex-Dividend Stocks

Besides stock price fluctuations, two major costs should be considered:

Dividend Tax Cost
In taxable personal accounts, you need to pay taxes on received dividends. For example, if you buy at $35 before the ex-dividend date and the stock drops to $31 on the ex-dividend date, you face an unrealized loss of $4 plus tax on the $4 dividend. This transaction only makes sense if you believe the stock price will recover quickly or if you plan to reinvest the dividends.

Note: In tax-advantaged accounts (like US IRAs or 401(k)s), this is not an issue.

Transaction Costs
In Taiwan’s stock market, the trading fee is 0.1425% of the stock price times the discount rate (usually 50-60%). When selling, you also pay a transaction tax: 0.3% for regular stocks, 0.1% for ETFs. These seemingly small costs can accumulate over high-frequency trading.

How to Handle Volatility Around the Ex-Dividend Date?

For long-term investors: Choose fundamentally strong companies, buy on the ex-dividend date, and hold long-term. Don’t overly focus on short-term price fluctuations. The intrinsic value of the company does not diminish because of dividend payments.

For short-term traders: There are indeed volatility opportunities around the ex-dividend date, but caution is essential. Participate moderately when the stock hits technical support levels and shows signs of stabilization, rather than blindly chasing high or buying at peak prices.

Core advice: Regardless of your strategy, fully understand the logic behind the ex-dividend date—it’s fundamentally a cash outflow event, not a value destruction event. Whether the stock price rises or falls depends on the market’s perception of the company’s future prospects.