Recently, many investors have been discussing the timing of buying and selling dividend-excluded stocks, especially those who want to buy heavily before the ex-dividend date and sell after. Honestly, this idea seems simple, but the underlying logic is actually much more complex than it appears.

First, let’s look at an interesting phenomenon. If a company can consistently pay stable dividends, it usually indicates healthy cash flow and a solid business model. That’s also why Warren Buffett particularly favors high-dividend stocks; more than 50% of his asset allocation is in such stocks. But for beginners, a common question is: does the stock price always fall on the ex-dividend date? Is the best entry point before or after the ex-dividend date?

Let’s first consider what theoretically should happen. Suppose a company earns $3 per share annually, and the market assigns it a 10x P/E ratio, so each share is valued at $30. The company has accumulated cash, say $5 per share, so the total valuation becomes $35. If the company decides to distribute a special dividend of $4 per share, theoretically, the stock price should drop from $35 to $31 on the ex-dividend date. This logic is straightforward—since the company’s assets decrease, the stock price should adjust downward.

But here’s a key point: theory is one thing, market reality is often different. Looking at historical trends, stock prices on the ex-dividend date can go up or down; a decline is not guaranteed. For example, Coca-Cola’s ex-dividend date in 2023 saw its stock price slightly rise, and Apple’s was even more dramatic—on November 10, 2023, the ex-dividend date, its price rose from $182 to $186. These leading stocks can behave this way because of multiple factors like market sentiment and company performance, not just the ex-dividend effect.

So, is the strategy of buying heavily before the ex-dividend date and selling after it feasible? It depends on the specific situation. First, observe the stock’s performance before the ex-dividend date—if the price has already risen to a high level, many investors might take profits early, and entering at this point could face selling pressure, increasing risk. Second, watch the trend after the ex-dividend date. Historically, stocks tend to decline more after the ex-dividend date, which is not very friendly to short-term traders, as buying in could lead to higher potential losses.

However, if the stock price continues to decline after the ex-dividend date until it hits a technical support level and begins to stabilize, that could be a good buying opportunity. For companies with solid fundamentals and industry leadership, the ex-dividend adjustment is just part of the stock’s price correction, and the intrinsic value doesn’t decrease. In such cases, the strategy of buying before and selling after the ex-dividend date might cause you to miss out on long-term gains.

Another often overlooked cost is taxes. In a taxable account, buying at $35 before the ex-dividend date and seeing the price drop to $31 on the ex-dividend date means you realize an unrealized capital loss, and you also have to pay taxes on the $4 dividend. Plus, transaction fees and trading taxes (for Taiwan stocks, the trading fee is about 0.1425% times the discount rate, and selling incurs a 0.3% transaction tax). These hidden costs can eat into your returns significantly.

My view is that the short-term strategy of buying before and selling after the ex-dividend date is suitable for traders who are sensitive to market volatility and have a high risk tolerance. But if you are a long-term investor focused on stable cash flow, it’s better to avoid frequent trading and instead choose fundamentally solid companies to hold long-term, letting dividends become part of your compound growth. The key is to make decisions based on your investment goals and risk appetite, rather than blindly following the crowd.