Sell on the ex-dividend date or hold long-term? Seize the best opportunity for high-dividend stocks

Many investors are particularly fond of high-dividend stocks, which often represent stable company management and ample cash flow. Over the long term, they can provide steady returns. “Warren Buffett” himself favors these stocks, allocating more than half of his assets to high-dividend stocks. However, for those new to dividend investing, a common confusion is how to operate around the ex-dividend date. Specifically, is selling on the ex-dividend day truly more profitable than at other times? Let’s analyze this issue in depth.

The Logic Behind Stock Price Adjustments on the Ex-Dividend Date

To understand whether you should sell on the ex-dividend date, first clarify how dividends affect stock prices.

When a company announces a cash dividend, investors who buy shares before the ex-dividend date are entitled to receive the dividend. On the ex-dividend date, the company pays out this cash from its balance sheet, reducing total assets. Theoretically, the stock’s value should decrease accordingly.

For example, consider a hypothetical company: annual earnings per share are $3, with a P/E ratio of 10, making the stock price $30. The company has accumulated cash reserves over the years, with $5 per share in idle cash, giving a total valuation of $35 per share.

Management decides to distribute a special dividend of $4 per share, keeping only $1 per share for emergencies. Theoretically, on the ex-dividend date, the stock price should adjust from $35 down to $31 ($35 - $4).

However, this is only a theoretical model. In actual markets, stock price movements on the ex-dividend date are far more complex and influenced by multiple factors.

Is Selling on the Ex-Dividend Day Really More Profitable?

The answer depends on various variables. In short, selling on the ex-dividend date isn’t always the best move.

Looking at historical performance: For example, Coca-Cola has a stable quarterly dividend history. In recent ex-dividend dates, the stock price has fluctuated—sometimes slightly down, sometimes slightly up. In some cases, the stock dipped modestly; in others, it rose slightly. The same pattern is even more evident with Apple—due to tech stocks’ popularity, Apple has sometimes surged over 6% on ex-dividend days.

Multiple factors influence this: The stock’s performance on the ex-dividend date isn’t determined solely by the dividend amount but also by market sentiment, company performance, overall market trends, and institutional investor actions.

Timing considerations:

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 additional taxes. This selling pressure can lead to a decline in stock price. Entering the market at this point might expose you to over-optimistic expectations already priced in, increasing risk.

Rights Offering and Discounting: Key Indicators for Selling Timing

To decide whether to sell on the ex-dividend date, understanding two key concepts is essential:

Fill-Right (填權息): After the ex-dividend date, the stock price drops, but as investors remain optimistic about the company’s prospects, the price gradually recovers to near pre-dividend levels. This indicates market confidence in future growth.

Post-Right (貼權息): The stock remains depressed after the ex-dividend date and fails to recover to previous levels over time. This often signals investor concern about the company’s future, possibly due to poor performance or market changes.

Using the earlier example: if the stock price drops from $31 to $30 after the ex-dividend date but then recovers to $35, it has completed a fill-right; if it stays below $35, it indicates a discounting trend.

For investors considering selling on the ex-dividend date, the historical tendency toward fill-right or discounting is crucial. For fundamentally strong companies, fill-right is more common, suggesting that selling immediately might not be optimal, as the stock could continue rising. Conversely, if a company’s history shows persistent discounts, selling on the ex-dividend date can be a timely way to cut losses.

Hidden Costs and Tax Planning Strategies

Decisions around the ex-dividend date should also consider tax and transaction costs.

Dividend tax costs: In tax-advantaged accounts like IRAs or 401(k)s in the US, taxes are deferred until withdrawal. In regular taxable accounts, dividends are taxed as income. For example, if you buy at $35 and the stock drops to $31 on the ex-dividend date, you also owe taxes on the $4 dividend, which can increase your effective loss.

Transaction costs: Besides taxes, trading fees and taxes matter. For example, in Taiwan’s stock market, buying incurs a fee of 0.1425% of the transaction amount (with discounts), and selling incurs a 0.3% transaction tax for common stocks or 0.1% for ETFs. These costs, though seemingly small, can accumulate and eat into gains.

A rational approach involves calculating potential gains against these costs to ensure a positive net return.

Short-Term Trading Opportunities vs. Long-Term Holding

For investors aiming to avoid dividend taxes while capturing short-term price movements around the ex-dividend date, short-term trading strategies like CFDs (Contracts for Difference) offer an alternative.

With CFDs, investors can control larger positions with less capital, taking long or short positions based on expected price movements, without owning the underlying stock. This means no dividend tax applies. If the market moves as anticipated, short-term gains can significantly outperform long-term dividend income.

However, this approach carries higher risks and requires strong market knowledge and risk management skills.

In contrast, for fundamentally sound companies with promising long-term prospects, buying after the ex-dividend dip and holding long-term often yields better results. The company’s intrinsic value isn’t diminished by the dividend, and short-term price adjustments may present better entry points.

Key Points for Rational Decision-Making

When deciding whether to sell on the ex-dividend date, consider the following:

• Assess the stock’s pre-dividend performance: Has it already reached a high level? What is the likelihood of continued selling pressure?

• Review the company’s historical ex-dividend behavior: Does it tend to recover (fill-right) or remain discounted (discounting)? What is the typical trend?

• Evaluate the company’s fundamentals and your investment horizon: Long-term investors should focus on company quality; short-term traders should analyze technical signals.

• Calculate actual costs, including taxes and fees: Ensure that expected gains outweigh these costs.

Overall, there’s no absolute answer to whether to sell on the ex-dividend date. The decision should be flexible, based on market conditions, individual stock performance, and personal investment goals.