Is it really worth buying the day before the ex-dividend date? A complete analysis of dividend traps and profit opportunities

Why Are Smart Investors Paying Attention to Dividend Stocks?

When mentioning stable dividend-paying listed companies, many people’s first reaction is: this business model is usually quite solid, and cash flow is healthy. Indeed — the companies that have long led the market almost always have a tradition of consistent dividends. In fact, in recent years, more and more investors have begun to regard high-dividend assets as a core pillar of their portfolios, and even “Stock Mogul” Buffett has allocated over 50% of his assets to high-dividend stocks.

However, for many novice investors just entering the dividend stock realm, two core questions often trouble them: Will the stock price definitely drop on the ex-dividend date? Should I buy before the ex-dividend date or wait until after? These seemingly simple questions actually involve complex market mechanisms and investment psychology.

Common Market Misconceptions: Price Drop on Ex-Dividend Date ≠ Inevitable

Many investors habitually believe that stock prices will fall on the ex-dividend date. This perception is not entirely wrong, but it is not absolute either.

From a theoretical perspective, the ex-dividend date indeed impacts stock prices. When a company distributes dividends or issues additional shares, the share capital increases. Under the premise that the company’s total value remains unchanged, the value per share decreases accordingly, leading to a downward adjustment in stock price. When dividends are paid out in cash, it means the company’s assets decrease, so while shareholders receive cash income, the stock price also tends to decline.

But this is only a theoretical conclusion. Looking back at recent market performance, stock prices on the ex-dividend date are not always downward. Actual price movements are influenced by multiple factors — market sentiment, company fundamentals, industry outlook, macroeconomic environment, etc., all of which can sway the price trend on the ex-dividend date.

Specifically:

Coca-Cola, known for its long history of dividends, has maintained stable quarterly dividends in recent years. On most ex-dividend dates, its stock price does dip slightly, but there are exceptions — on September 14 and November 30, 2023, Coca-Cola’s stock actually rose slightly on the ex-dividend dates, while on June 13, 2025, and March 14, the stock showed declines.

Apple’s situation is even more evident. As a tech giant, Apple also pays quarterly dividends. Over the past year, due to continued enthusiasm for tech stocks, Apple’s stock often rose on the ex-dividend date — on November 10, 2023, the stock increased from $182 to $186; on May 12 of this year, the rise was even 6.18%.

Similar patterns are seen with industry leaders like Walmart, Pepsi, Johnson & Johnson. These companies often show stock price increases on their ex-dividend dates.

Is Buying the Day Before the Ex-Dividend Date Wise? Three Dimensions to Consider

To determine whether buying the day before the ex-dividend date is worthwhile, you need to consider the following three key factors:

First: The stock price position before the ex-dividend or ex-rights date is crucial

In the period after the ex-dividend or ex-rights announcement, many investors choose to realize gains early, especially those seeking to avoid personal income tax burdens. They often sell their holdings on the day before the ex-dividend date. This can lead to the stock price already reflecting excessive expectations or facing significant selling pressure.

Therefore, if you buy on the day before the ex-dividend date, you might be entering at a price that has already been inflated, increasing subsequent risk.

Second: The historical pattern of stock price movement after dividends

Long-term data shows that stocks tend to decline further after the ex-dividend date rather than rise. This trend is unfavorable for short-term traders, as buying after the ex-dividend date may involve the risk of losses.

But this does not mean there are no opportunities. If the stock price continues to fall after the ex-dividend date until it hits a technical support level and shows signs of stabilization, that could be a more attractive entry point.

Third: The company’s fundamentals determine long-term returns

For companies with solid fundamentals and leading positions in their industry, dividend payments are often viewed as technical adjustments in stock price rather than a real reduction in company value. Conversely, a stock price correction may provide investors with a better opportunity to acquire quality assets at a more favorable price.

For such stocks, buying after the ex-dividend date and holding long-term is often more cost-effective — because the intrinsic value of the company does not decrease due to dividends; in fact, the price adjustment can make the stock more attractive.

Theory and Practice: The Mathematical Logic of Price Adjustment

Let’s take a stable profitable company as an example:

Suppose the company earns $3 per share annually. Based on its business advantage and competitive environment, the market values it at a P/E ratio of 10, i.e., $30 per share. Years of profit have accumulated substantial cash reserves, amounting to $5 per share. So, the company’s total valuation is $35 per share.

The company considers that holding too much cash is inefficient and decides to pay a special dividend of $4 per share, retaining only $1 per share as emergency funds. Assume the ex-dividend date is June 15, with the record date also on June 15.

Theoretically, the stock price on the ex-dividend date should be the previous day’s closing price minus the dividend amount. Using the above assumptions, the stock price would adjust from $35 to $31.

In the case of a rights issue, calculations are more complex. The formula is:

Post-rights issue stock price = (Pre-issue price - (Issue price )) / (1 + Rights ratio)(

For example: a stock priced at $10 before the rights issue, with a rights issue price of $5, and a rights ratio of 1 new share for every 2 existing shares, the calculation is:

Post-rights stock price = )10 - 5( / (2 + 1)) = 5 / 3 ≈ $1.67

Fill-Right vs. Ex-Rights: The Key to Assessing True Stock Value

Post-dividend performance often exhibits two typical phenomena:

Fill-Right: After the ex-dividend, the stock price temporarily drops, but as investors become optimistic about the company’s prospects, the price gradually recovers to or near the pre-dividend level. This reflects investor confidence in future growth.

Ex-Rights: The stock remains sluggish after the ex-rights date, unable to recover to the pre-dividend level over the long term. This usually indicates investor skepticism about the company’s future performance, possibly due to poor earnings or changing market conditions.

Using the previous example, if the stock price rises from $31 back to $35 after the ex-dividend or ex-rights date, it completes a fill-right; if it fails to reach $35, it is a case of ex-rights.

Hidden Costs Not to Overlook: Taxes, Fees, and Transaction Costs

( Tax considerations

If investors buy dividend stocks in tax-advantaged accounts (like IRA or 401K in the US), they generally do not pay taxes until withdrawal.

However, in regular taxable accounts, the situation is more complex. Using the earlier example: buying at $35 before the ex-dividend date, with the stock dropping to $31 on the ex-dividend date, results in an unrealized capital loss, and the investor must pay income tax on the $4 dividend. Only if the investor expects the stock price to recover quickly from the dividend payout does buying before the ex-dividend date make sense.

) Transaction costs

In Taiwan’s stock market, the transaction fee is calculated as:

Stock price × 0.1425% × brokerage discount rate (usually 50-60%)

The transaction tax (paid upon selling) varies by stock type:

• Ordinary stocks: 0.3%
• ETFs: 0.1%

Transaction tax = stock price × applicable tax rate

These costs can significantly erode short-term trading profits.

Rational Investment Decision-Making

Dividend stocks’ price behavior on the ex-dividend date is influenced by many factors. Investors should avoid being constrained by stereotypes like “price must fall on the ex-dividend date,” and instead evaluate based on:

• Whether the pre-ex-dividend price is already high
• The stock’s historical fill-right performance
• The company’s fundamental health
• Whether they have a long-term holding plan
• The specific impact of taxes and transaction costs

Only by thoroughly considering these factors can investors make rational buy or sell decisions on the ex-dividend date. Remember, short-term market fluctuations often hide risks, while long-term value investing requires patience and wisdom.