Is it really unavoidable for stock prices to fall before ex-dividend? Unveiling the secret to buying high-dividend stocks

Stable dividend-paying listed companies often signify a solid business model and sufficient cash flow support. Looking at the A-shares and US stocks markets, most long-term high performers have a tradition of consistent dividends. In recent years, more and more investors are starting to regard high-dividend stocks as core assets in their portfolios, and even investment master Warren Buffett is particularly fond of such stocks, with over 50% of his asset allocation leaning toward high-dividend stocks.

However, for investors new to dividend stocks, two questions often trouble them: Will stock prices definitely fall on the ex-dividend date? When is the best time to buy—before or after the ex-dividend date?

Is a price drop before the ex-dividend date an inevitable phenomenon?

Many believe that stock prices will definitely fall on the ex-dividend date, but this understanding is actually too absolute.

From a theoretical perspective, when a company pays cash dividends, its cash assets genuinely decrease, so it’s logical for the stock price to be under pressure. But looking at historical trends, we find that a price decline on the ex-dividend date is not a strict rule. Many industry leaders with stable performance and high popularity actually see their stock prices rise on the ex-dividend date.

Logic of how rights and dividends affect stock prices

To understand this, we need to clarify two mechanisms:

Ex-rights: When a company issues bonus shares or rights issues, the share capital increases. Assuming the total value of the company remains unchanged, the value represented by each share decreases accordingly, leading to a drop in stock price.

Ex-dividend: When a company distributes cash dividends to shareholders, it’s equivalent to an actual outflow of company assets. Shareholders receive cash, but the stock’s intrinsic value also decreases accordingly.

Specific case calculations

Suppose a company’s annual earnings per share (EPS) are $3, and based on its industry competitiveness and business outlook, the market assigns a P/E ratio of 10, so the stock price is $30.

Years of profit accumulation have given this company ample cash reserves—$5 per share. This cash is either kept in a bank account or invested in short-term government bonds. Therefore, the total valuation of the company reaches $35 per share.

Management considers holding so much idle cash unwise and decides to distribute a special dividend of $4 per share, leaving only $1 per share for contingencies. The record date for the dividend is June 15, and the ex-dividend date is also set accordingly.

On the ex-dividend date, the theoretical value of the stock should be the previous day’s closing price minus the dividend—dropping from $35 to $31.

The situation with rights issues is a bit more complex, calculated as:

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

For example: a stock trading at $10 before the rights issue, with a rights issue price of $5, and a ratio of 2 old shares to 1 new share, then the post-rights price = (10 - 5) / (2 + 1) ≈ $1.67.

But here’s a key point: Although a price decline on the ex-dividend date is common, it is not guaranteed. Reviewing actual trends, stock prices after rights and dividends can go up or down because price movements are influenced by many factors beyond rights and dividends—market sentiment, company performance, market environment, etc.

Take Coca-Cola as an example. The company has a long history of paying dividends, with stable quarterly payments in recent years. Usually, on the ex-dividend date, the stock price slightly declines, but it often also shows small increases. On September 14, 2023, and November 30, 2023, Coca-Cola’s stock prices rose on the ex-dividend date; whereas on June 13, 2025, and March 14, 2024, the stock price dipped slightly.

Apple’s performance is even more dramatic. Due to recent popularity of tech stocks, Apple often sees significant gains on the ex-dividend date. On November 10, 2023, the ex-dividend date, Apple’s stock rose from $182 to $186; on May 12 of this year, the increase was as high as 6.18%.

Blue-chip stocks like Walmart, Pepsi, Johnson & Johnson also often see rises on ex-dividend days.

Overall, the size of the dividend, market popularity, company performance, and other factors all become key variables influencing stock price movements on the ex-dividend date.

Is buying after the ex-dividend date more cost-effective? It depends on these three points

There is no standard answer; it requires specific analysis:

First, understand two key concepts

Ex-rights and ex-dividends rebound (填權息): After the ex-dividend date, although the stock price temporarily drops due to the dividend payout, investor optimism about the company’s prospects can lead to a gradual rebound, restoring the price to pre-dividend levels. This reflects investors’ positive outlook on the company’s future growth.

Ex-rights and ex-dividends remain depressed (貼權息): After the ex-dividend date, the stock price continues to decline over a period, failing to recover to pre-dividend levels. This usually indicates investor concerns about the company’s outlook, possibly due to poor performance or market environment changes.

Using the above example, if the stock price rises from $31 back to $35 after the ex-dividend date, it’s a successful rebound (填權息); if it remains below $35, it’s a depressed situation (貼權息).

Consideration 1: Stock price performance before the ex-dividend date

If the stock price has already risen to a high level before the ex-dividend date, many investors prefer to realize gains early, especially to avoid tax burdens. This means that buying near the ex-dividend date may not be the best strategy—by then, the stock price already includes excessive expectations or selling pressure.

Consideration 2: Historical trend of stock prices after the ex-dividend date

Looking back, stocks tend to decline more often than rise after the ex-dividend date. This is not friendly to short-term traders; buying then carries a higher risk of loss, making purchasing around the ex-dividend date less economical.

However, if the stock price continues to decline after the ex-dividend date until reaching a technical support level and begins to stabilize, that might be a genuine buying opportunity.

Consideration 3: Company fundamentals and long-term holding perspective

For fundamentally solid, industry-leading companies, the ex-dividend adjustment is just part of the stock’s price adjustment and does not imply a loss of value. Instead, it may offer investors a chance to acquire quality assets at a more attractive price.

Therefore, for such stocks, buying after the ex-dividend date and holding long-term is often a more cost-effective strategy. The intrinsic value of the company does not decrease due to the dividend payout; the price correction might make it more attractive.

Hidden costs to watch out for when participating in dividend stocks

Dividend tax costs

If you buy ex-dividend stocks in a tax-advantaged account (like a US IRA or 401K), taxes are not an issue.

If you buy in a regular taxable account, it gets complicated. For example, if you buy at $35 before the ex-dividend date, and on the ex-dividend date the stock drops to $31, you face an unrealized capital loss while also having to pay taxes on the $4 dividend—this increases your cost.

Of course, if you plan to reinvest the dividends into the same company and expect the stock price to recover quickly from the dividend, buying before the ex-dividend date makes sense.

Transaction fees and taxes

On many exchanges, buying and selling stocks incurs transaction fees and taxes.

For example, in Taiwan’s stock market, the transaction fee is calculated as: Stock price × 0.1425% × brokerage discount rate (usually 50-60%)

Transaction tax varies by stock type:

• Common stocks: 0.3%
• ETFs: 0.1%

The tax calculation is: Stock price × applicable tax rate

These costs may seem small, but frequent trading can gradually eat into your returns.

Summary: A three-step rational decision-making approach

Dividend stocks’ price performance on the ex-dividend date is influenced by multiple factors. Investors should consider the pre-ex-dividend price trend, historical performance, company fundamentals, and combine these with their investment horizon and risk tolerance to make rational choices.

For long-term investors, focusing on company quality and dividend sustainability is far more valuable than short-term fluctuations around the ex-dividend date. For high-dividend stocks with solid fundamentals, buying during the price dip caused by the ex-dividend adjustment is often a more cost-effective approach.