Can you make money by selling after the dividend? Uncovering the truth about high-dividend stocks

Many people have misconceptions about high-dividend stocks. If a company can consistently pay stable dividends, it indicates a solid business model and healthy cash flow. In recent years, more and more investors are considering high-dividend stocks as core holdings, and even Warren Buffett has allocated over 50% of his assets to such stocks.

But beginners often fall into the dilemma: Do stock prices really drop on the ex-dividend date? Is selling after the ex-dividend date a worthwhile choice?

Stock Price Drops on the Ex-Dividend Date Are Not Inevitable

The common belief is that stock prices fall on the ex-dividend date, but historical data breaks this myth.

Theoretical stock price adjustment logic is as follows:

When a company distributes cash dividends, it means assets decrease. Suppose a company earns $3 per share annually, valued at a P/E ratio of 10, with a share price of $30. The company has accumulated $5 per share in cash reserves, making the total valuation $35 per share. When the company decides to pay a special dividend of $4 per share, theoretically, the stock price should drop from $35 to $31 on the ex-dividend date.

However, in reality, stock price performance on the ex-dividend date is influenced by multiple factors—market sentiment, company performance, industry outlook—all of which can interfere with this theoretical price.

Coca-Cola is a typical example: the company pays dividends quarterly, and most ex-dividend dates see slight declines in stock price, but on September 14 and November 30, 2023, the stock price actually rose slightly. Apple Inc. performed even more dramatically: on the November 10, 2023 ex-dividend date, the stock rose from $182 to $186, a 6.18% increase. Leading stocks like Walmart, Pepsi, Johnson & Johnson also often see stock price gains on ex-dividend days.

Conclusion: While stock prices often decline on the ex-dividend date, it is not a certainty.

Is Selling After the Ex-Dividend Date a Good Deal? Analyzing from Three Perspectives

The answer to this question depends on three variables:

(1) The stock price position before the ex-dividend date

If the stock price has already risen to a high level before the ex-dividend date, many investors tend to take profits early. Entering at this point is chasing a high, which carries higher risk. Conversely, if the stock price has been steadily declining before the ex-dividend date, approaching technical support levels and showing signs of stabilization, that is a genuine buying opportunity.

The logic of selling after the ex-dividend date is the reverse: if you bought before the ex-dividend date and the stock price rebounds afterward (industry term “fill the rights issue”), selling during the rebound can realize short-term gains.

(2) Historical trend patterns

Looking back, stocks tend to decline rather than rise after the ex-dividend date. This is unfavorable for short-term traders, implying higher risk of losses after buying.

But it also presents an opportunity: when the stock price continues to slide after the ex-dividend date and stabilizes on technical charts, it may be a good time to reverse position and wait for a rebound.

(3) Company fundamentals and trading cycle

For companies with solid fundamentals and industry leadership, the ex-dividend adjustment is just a technical correction, not a reduction in value. Buying such stocks after the ex-dividend date and holding long-term is often profitable.

However, if your goal is short-term trading, the volatility before and after the ex-dividend date becomes a source of price difference. The timing of selling after the ex-dividend date is crucial—either sell during the rebound or after the price bottoms and stabilizes.

Fill the Rights Issue vs. Stick to the Rights Issue: Two Completely Different Outcomes

These two concepts determine your operational strategy before and after the ex-dividend date:

Fill the Rights Issue: After the stock goes ex-dividend, the price temporarily drops, but as investors remain optimistic about the company’s prospects, the stock gradually recovers to pre-dividend levels. This indicates market optimism about the company’s growth.

Stick to the Rights Issue: After the ex-dividend date, the stock price remains sluggish and fails to recover to pre-dividend levels. This usually reflects investor concerns about the company’s outlook.

Example: A company trades at $35 before the ex-dividend date and drops to $31 afterward. If it then rebounds above $35, the rights issue is considered “filled”; if it stays below $31, it is a “stuck” rights issue.

Hidden Costs in Ex-Dividend Trading

Tax costs:

If held in a taxable account, on the ex-dividend date you face a double hit—the paper loss from the stock price decline and the tax on the dividend payout. In the above example, buying at $35 and dropping to $31 on the ex-dividend date means you owe tax on the $4 dividend, increasing your effective cost.

Transaction fees and trading taxes:

In Taiwan’s stock market, the transaction fee is “stock price × 0.1425% × brokerage discount rate (usually 50-60%)”. When selling, you also pay a transaction tax: 0.3% for regular stocks, 0.1% for ETFs.

These costs may seem small but can significantly impact short-term high-frequency trading returns. When trading around the ex-dividend date, you must consider whether these expenses will eat into your profit margins.

Practical Recommendations

For long-term investors: buy fundamentally sound stocks before the ex-dividend date and hold long-term, waiting for the rights issue to fill.

For short-term traders: focus on the stock price position before the ex-dividend date and the rebound magnitude afterward. Buy near technical support levels and sell at key resistance points during rebounds, avoiding excessive costs from taxes and fees.

The volatility around the ex-dividend date is essentially market pricing. Mastering the timing of entry and exit can still make profits from selling after the ex-dividend date.