Dividend Gap Explained: Why a Stock Drops After the Ex-Dividend Date
After the dividend cutoff date, a stock's price often drops at the open. That's a dividend gap. Here's why it happens and why “buying for the dividend” isn't as profitable as it seems.
What it is
A dividend gap is the drop in a stock's price after the date when buying it no longer gives you the right to the dividend. The payout money leaves the company and goes to shareholders, so the stock itself is worth less — by roughly the dividend amount. On the chart, it looks like a gap.
Example
| Value | |
|---|---|
| Price before the cutoff | 200 ₽ |
| Dividend | 20 ₽ |
| Price after the gap | about 180 ₽ |
| Dividend after 13% tax | 17.4 ₽ |
You receive the dividend, but the stock is now cheaper. If you buy the day before the cutoff and sell after, you often end up with a loss once tax is taken into account (the example uses rubles and Russia's 13% personal income tax).
Will the gap close?
Sometimes the price recovers within weeks, sometimes it takes years if the company has problems. Look at the business, not a single dividend: the fundamental analysis lesson and the article dividends explained simply.
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- After the cutoff, the price falls by roughly the dividend.
- Buying for a single payout often doesn't pay off because of tax.
- The gap closes for strong companies, not on a schedule.
Frequently asked questions
When do I need to buy a stock to get the dividend?
Before the cutoff date, taking the exchange's settlement cycle into account. The exact last day to buy is published by your broker or the exchange.
Does the price always fall by exactly the dividend?
No. Other news also affects the price, so the drop can be bigger or smaller than the payout.
Is a dividend gap a loss?
Overall, no: the value went to you as a dividend. But tax reduces the final result.
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