Is it really worth buying before the ex-dividend date? The three hidden truths about high-dividend stocks

Many people believe that stock prices will definitely fall on the ex-dividend date, and that it’s best to wait until after the dividend is paid before entering the market. However, in reality, this idea may cause you to miss better opportunities.

Falling stock prices on the ex-dividend date are not inevitable

Let’s first look at the theoretical aspect. On the ex-dividend date, due to the company’s cash outflow, the stock price technically adjusts downward. Simply put, if a company’s stock is valued at $35, which includes accumulated cash reserves, and the company decides to distribute a $4 dividend per share, the theoretical stock price on the ex-dividend date should drop from $35 to $31.

But reality is often more complicated than theory. Historical data shows that stock prices can rise or fall on the ex-dividend date. For example, Coca-Cola, which pays stable quarterly dividends, saw its stock price slightly increase on the September and November 2023 ex-dividend dates, with only some ex-dividend dates experiencing a decline. Apple is even more extreme; due to strong popularity in tech stocks, its stock price rose from $182 to $186 on the November 2023 ex-dividend date, a 2.2% increase; in May this year, the stock jumped by 6.18% on the ex-dividend date.

The factors influencing stock price fluctuations are not limited to dividends alone. Market sentiment, company performance, industry outlook, and other factors all play a role. Leading stocks like Walmart, PepsiCo, and Johnson & Johnson often also rise on the ex-dividend date because investors have confidence in their fundamentals.

Key considerations for buying before the ex-dividend date

Instead of blindly waiting for after the ex-dividend date, it’s more rational to consider buying before the ex-dividend date.

First, look at the stock price trend. If a stock has already risen sharply and reached a high level before the dividend announcement, there is often a risk of profit-taking. Many investors choose to sell before the ex-dividend date to avoid tax burdens, which means the stock price may have already priced in some of the expected dividend. In this case, waiting might be wiser—wait for the price to adjust and buy at a technical support level.

Second, observe historical performance. Data shows that many quality stocks enter a “recovery phase” after the ex-dividend date—although the stock price may decline in the short term, as investors remain optimistic about the company’s prospects, the price gradually recovers to pre-dividend levels or even higher. This indicates long-term confidence in the company’s growth. Conversely, if the stock price remains below the ex-dividend price (trading at a discount), it warrants caution regarding the company’s fundamentals.

Third, evaluate the company’s fundamentals. For industry leaders with stable cash flow and consistent dividend payments, the ex-dividend date is more of a structural adjustment rather than a value destruction. Buying such stocks before the ex-dividend date can be an opportunity to acquire quality assets at a better price.

Hidden costs of ex-dividend trading

When planning trades around the ex-dividend date, don’t overlook these costs.

Tax implications on dividends are the most critical. Buying high-dividend stocks in a taxable account exposes you to double hits: first, an unrealized capital loss from the stock price dropping on the ex-dividend date; second, taxes on the received dividends. For example, if you buy at $35 before the ex-dividend date, and the price drops to $31 on the ex-dividend date, plus you receive $4 in dividends that are taxable, the tax costs may offset part of the dividend income.

Using a deferred tax account (like an IRA) allows you to avoid taxes until withdrawal, which is a good way to reduce costs.

Transaction fees and taxes also need to be considered. For example, in Taiwan’s stock market, the trading fee is 0.1425% of the stock price times a discount rate (usually 50-60%), and a 0.3% transaction tax applies when selling (0.1% for ETFs). Frequent trading can accumulate these costs.

When is the right time to enter?

Back to the core question: Is buying before the ex-dividend date really worthwhile?

The answer depends on a combination of three factors:

1. Whether the stock has already risen significantly before the dividend announcement—if yes, it’s better to wait for a correction.
2. Whether the stock has a history of “filling the rights issue”—if yes, long-term holding may be more profitable.
3. How long your holding period is—long-term investors don’t need to overthink timing.

In short, for fundamentally strong high-dividend stocks, buying before the ex-dividend date isn’t necessarily a loss; it can be a good opportunity for regular accumulation. The key is to combine individual stock performance, historical patterns, and personal investment goals, rather than blindly believing the common saying “buy cheaper after the ex-dividend.”

True investment wisdom lies not in predicting every rise and fall of stock prices, but in making rational decisions based on a framework that matches your risk tolerance.