Should you buy before the ex-dividend date?

Probably not. That’s the answer I’ve come up with. As a new investor who uses Robinhood, I find myself buying smaller blocks of shares more frequently. Whether I should buy before or after the ex-dividend date comes up a lot. Everyone wants to get that first dividend payment!

First, what is the ex-dividend date?

If you buy a share of stock before the ex-dividend date, you will receive the upcoming dividend payment. If you buy on or after the ex-dividend date, you will not receive the upcoming dividend. It is the cutoff point.

Why not buy the day before and sell the day after the ex-dividend date?

This is called dividend capture strategy and is widely agreed not to work. Anticipated dividend payments are priced into share value. The ex-dividend date passes and share price drops by an amount equal to the dividend assuming an efficient market. Other factors do drive the price fluctuation beyond the dividend amount, but I will assume efficient markets for this post.

Example: Let’s consider a $100/share stock that yields 4% ($1 every three months). I buy one share for $100 just before the ex-dividend date. Two days later, I own rights to the $1 dividend payment, and sell the share for its new value of $99. Later, I receive my $1 dividend. I also now owe taxes on that $1 of income. I’ve come out with a net loss.

So disregarding dividend capture, should you buy before or after the ex-dividend date?

I turned some spreadsheet gears and dusted off my science fair terminology. I made up a stock worth $100/share with a quarterly dividend. I assumed the stock price dropped by the amount of the dividend and steadily climbed back to $100 in time for the next quarterly ex-dividend date. I also assumed a 15% tax rate on dividend income.

I ran one column where I purchased one share for $100 before the ex-dividend date and received the first dividend. I ran another column where I purchased one share for the reduced price after the ex-dividend date and missed out on the first dividend. I calculated Account Value over 80 quarters (or 20 years). Notice that I got the benefit of owning slightly more shares for the same initial $100 investment by buying after the ex-dividend date since the share price goes down by the dividend amount.

To recap my experiment:

Constant variables: $100 initial investment, quarterly dividends, 20-year test period, $100 perpetual share price reduced by amount equal to dividend immediately after ex-dividend date which grows back to $100 prior to next ex-dividend date, 15% tax rate on dividend income, reinvested dividends.

Independent variables: initial yield, dividend growth rate, purchase date before vs after.

Dependent variables: shares owned, total account value.

Measuring stick: % difference between Account Values.

Conclusion

It hardly matters one way or the other. Stock purchases should not be made depending on ex-dividend dates. My calculations indicated there was always a slight advantage in waiting until after the ex-dividend date, but it was tiny compared to normal market fluctuations.

Dividend growth rate and time in the market has no effect on this simulation. As a dividend growth investor, I definitely wanted to test different dividend growth rates. Holding other variables constant, dividend growth rate caused neither account to grow faster or slower.

Initial Yield does cause a minor effect. Stocks with higher initial yield are better to purchase after the ex-dividend date. I believe this is due to the higher number of initial shares that can be purchased immediately after the ex-dividend date.

What are your thoughts on how I ran this? Do you agree or disagree?

4 thoughts on “Should you buy before the ex-dividend date?

  1. Interesting analysis, DD. I would have thought that a higher dividend growth rate might have made a difference.
    FYI…. I noticed that both of your columns showing the $100 purchase before and after data both show “before”. I assumed the right one was the ‘after’ due to the higher share count.
    I would agree with your conclusion. I’d imagine the results would be even closer if the dividend one received by making the investment prior to the ex-dividend date was reinvested immediately elsewhere.

    1. Good eye, Engineering! I fixed that column header.

      I thought a different dividend growth rate would accelerate or decelerate the difference between the two scenarios. Changing the dividend growth rate instead made zero impact on the difference between account values! Overall, I learned there’s almost no difference between buying before vs after, and it’s probably best not to base decisions on the ex-dividend date coming up or not.

  2. Your initial example seems inaccurate.

    If you purchase stock at $100, sell at $99, and capture the $1 dividend, that is a net zero regarding taxable income. Your $1 loss in capital will offset the $1 dividend gain.

    Sidenote: the example you have laid out is not a dividend capture strategy. Dividend capture is entering AND EXITING around ex-div dates, not holding dividend growth long-term.

    I am currently employing a dividend capture strategy using Robinhood. Small sample thus far, so I won’t tout my methods or anything just yet. Came across this article while doing more dividend capture research.

    1. Thanks for stopping by and commenting Kyle! Good point on claiming a $1 capital loss against a $1 dividend gain coming out as a net zero. I think dividend capture strategy still depends on a toss up – will the share price move positively during the short time you hold it, factoring for the drop due to the dividend payment. Do you plan to post your results anywhere? If so I’d love to see how works out.

      I wanted to quickly address dividend capture with one paragraph to identify and separate it from what I wanted this article to be about. I see some long-term dividend growth investors pick one stock over another because they can get a quick dividend payment to start off. I wanted to look further into whether it was better to start off holding a stock long-term with an immediate dividend payment vs a delayed dividend payment down the road at some point.

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