Recently, many people have been debating whether they should enter the market before or after the ex-dividend date, especially regarding the question of whether to sell on the ex-dividend date to receive the dividend. Honestly, this is indeed one of the most easily misunderstood aspects of dividend stock investing.

First, let’s state the conclusion: a drop in stock price on the ex-dividend date is not inevitable. Many believe that stock prices must fall on the ex-dividend date, but historical data shows that’s not the case at all. I noticed that Coca-Cola’s stock price on the ex-dividend rights days of September 14 and November 30, 2023, actually saw slight increases. Even more striking, Apple’s stock price rose from $182 to $186 on the ex-dividend rights day of November 10, 2023, nearly a 2% increase. Industry leaders like Walmart, Pepsi, and Johnson & Johnson often see their stock prices rise on ex-dividend or ex-rights days. Therefore, stock price movements are influenced by many factors, not just the dividend.

Theoretically, stock prices should decline on the ex-dividend date because the company’s assets decrease. For example, suppose a company earns $3 per share annually, with a P/E ratio of 10, making the stock price $30. If the company has accumulated $5 in cash per share, the total valuation is $35. If it distributes $4 per share as dividends, the stock price should theoretically drop from $35 to $31 on the ex-dividend date. But in reality, market sentiment, earnings expectations, industry outlooks, and other factors all influence the actual stock price performance.

Regarding whether you get the dividend if you sell on the ex-dividend date, the answer is yes, but only if you hold the stock before the ex-dividend rights registration date. If you sell on the ex-dividend date itself, you won’t receive the dividend. So, if you want to receive the dividend, you must buy the stock before the ex-dividend date and hold it until the ex-dividend rights registration date.

Is it worthwhile to buy stocks before or after the ex-dividend date? I think it depends on three aspects. First, check whether the stock price has already been driven up before the ex-dividend date. If the price has risen to a high level, many investors might take profits early, and entering at this point could be risky. Second, look at historical trends: stocks tend to decline rather than rise after the ex-dividend date, making short-term trading riskier. However, if the stock price falls to a technical support level and shows signs of stabilization, it could be a good buying opportunity.

The third and most important perspective is the company’s fundamentals. For solid, industry-leading companies, dividends are more of a price adjustment rather than a reduction in value. For these companies, buying after the ex-dividend date and holding long-term is often more profitable because their intrinsic value doesn’t decrease due to the dividend payout.

Another hidden cost to consider is if you buy dividend stocks in a regular taxable account. If you buy at $35 before the ex-dividend date and the price drops to $31 on the ex-dividend date, you’ll face unrealized losses, plus you’ll need to pay taxes on the $4 dividend. This can be quite inefficient. In contrast, using tax-advantaged accounts like IRAs or 401(k)s avoids this issue.

Additionally, in Taiwan’s stock market, there are transaction fees and stamp duties. The transaction fee is calculated as stock price times 0.1425%, then multiplied by the discount rate (usually 50-60%). The stamp duty for regular stocks is 0.3%, and for ETFs, it’s 0.1%. These costs add up and should be considered.

So, how should you operate around the ex-dividend date? Holding high-dividend stocks long-term can provide steady income, but if you want to profit from short-term price swings around the ex-dividend date, simply holding the stock might not be flexible enough. Some investors consider using derivatives like contracts for difference (CFDs) to capture short-term volatility, controlling large positions with small margin, and enabling flexible long or short positions without actually owning the stock—thus avoiding dividend taxes. Of course, these leveraged tools carry significant risks, so they should be used according to your risk tolerance.

In summary, stock price performance on the ex-dividend date is influenced by multiple factors and is not simply an inevitable decline. Investors should make decisions based on their goals, risk appetite, company fundamentals, and historical trends.