Is it better to miss the dividend and buy the undervalued stock?

The stock tends to drop by the amount of the dividend -- or if you prefer to think of it this way, the stock price has been pushed up by the amount of the dividend before it was paid out.

Really, all this shift does is factor out the impending dividend's effect on the real purchase cost of the stock. As such it's pretty much irrelevant except that, of course, the dividend is short-term gain that you have to pay taxes on almost immediately. Which also tends to get figured into the price folks are willing to pay for the stock.

Conclusion: no, there's no real opportunity here. There's a slight tax reason to avoid buying right before dividends are paid, but that's about it.

Basic principle: If it's simple and obvious,the market has already accounted for it.

I guess the answer lies in your tax jurisdiction (different countries tax capital gains and income differently) and your particular tax situation.

If the price of the stock goes up or down between when you buy and sell then this counts for tax purposes as a capital gain or loss. If you receive a dividend then this counts as income.

So, for instance, if you pay tax on income but not on capital gains (or perhaps at a lower rate on capital gains) then it would pay you to sell immediately before the stock goes ex-dividend and buy back immediately after thereby making a capital gain instead of receiving income.

As yet another explanation of why it does not really matter, you can look at this from the valuation point of view. Stock price is the present value of its future cash flows (be it free cash flow of the firm or dividends, depending on the model). Let's have a look at the dividends case. Imagine, the price of the stock is based on only three dividends streams $5 dollars each: dividend to be paid today, in year 1, and in year 2. Each should be discounted back to today (say, at 10%), except today's dividend, since today is now.

         Dividend   PV of Dividends
Year 0   $5             $5.00 [5/(1+10%)^0]
Year 1   $5             $4.55 [5/(1+10%)^1]
Year 2   $5             $4.13 [5/(1+10%)^2]

Value                   $13.68  

Once that dividend is paid, it is no longer in the stream of cash flows. So if we just delete that first $5 from the formula, the price will adjust itself down by the amount of the dividend to $8.68. NOTE that this is a very simple example, since in reality cash flows streams are arguably infinite and because there are many other factors affecting stock price. But simply for your understanding, this example should provide you with the reason simply from the valuation perspective.

There is no bounce back because the new, lower, value is the correct value. So, depending on market fluctuations and economy, the stock may go up or down in similar way it was doing. So you are taking the same risk with buying as any other time in the year.

While company valuation has merit, the company's value before and after the ex-div date doesn't determine share price on any given day because the stock market is an auction. It is the daily mindset of buyers and sellers that determines price (more buy volume than sell volume or vice versa) not some accounting analysis.

Share price is reduced on the ex-div date by the exact amount of the dividend so there's no benefit to buying a stock for the dividend. If this is done in a non sheltered account then the dividend is taxable and all you have achieved is incur a tax event just for receiving a portion of your own money back on the Pay Date. So from this perspective, it makes sense to buy the stock on the ex-div date rather than the day before.

However, share price isn't stagnant. Share price may rise or fall just prior to the ex-div date. It may also rise or fall on the ex-div date. So the best approach is to buy the stock after any price drop that makes the purchase price more attractive to you.