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?

2 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.

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