Taking Advantage of Stocks Distributing Dividends

“Your Choice Determines Your Destiny!”

Few days ago, I got a request from one of the reader of this site. Here’s the screen shot of his request:

request Dividend

Before going into the details on How to Play the Dividends, here are the definitions that you need to know. More explanation can be read in my previous blog.

  • Declaration Date – Board of Directors announces the payment of Dividend
  • Ex-Dividend Date – The Stock starts to trade without the dividend
  • Record Date – Current shareholders on the record book will receive the dividend
  • Payment Date – Company issue the dividend payments

The dividend timeline below illustrates the four dates investors(traders) must understand and monitor in order to effectively implement their dividend play strategies.

Figure 1. Dividend Timeline

Figure 1. Dividend Timeline

Maybe, you are already aware that dividends are one of the many factors that influence the stock price, though not really a big impact compared to other variables such as company earnings, arbitration’s issue like what happened recently with MWC and MPI.

In this article, I’m going to take a look on the common ways to trade around the dividends.

PHILIPPINE STOCK DIVIDEND HISTORY

As a Dividend Investor, Most of the time I am looking into stocks known as blue chips since these stocks are considered stable. I reviewed my database and filter the stocks that distributes dividends for the last five years, below is the top 5 blue chips dividend stocks ranked base on the dividend yield.

RANK STOCK LAST PRICE YR2009 TOTAL DIVIDEND YR2010 – 2014 DIVIDEND YIELD LAST PRICE YR2014 PRICE %CH YR2009-2014 TOTAL RETURN
1 DMC           1.94       8.5000 438.14%         15.70 709.28% 1147.42%
2 SCC         18.33     52.0000 283.64%      142.00 674.55% 958.18%
3 AEV           9.00       7.4800 83.11%         52.70 485.56% 568.67%
4 AP           8.60       4.9400 57.44%         42.90 398.84% 456.28%
5 URC         16.25       8.2800 50.95%      196.00 1106.15% 1157.11%

The following screen shots shows the stock prices movement around the dividend dates:

AEV

AEV

AP

AP

DMC

DMC

SCC

SCC

URC

URC

ACCUMULATE BEFORE THE DECLARATION DATE

It seems the idea of accumulating before the declaration date is good. If you notice, almost all of the five stocks shown above, the stock price started increasing prior to the declaration date. For Dividend Investor this may not really matter. I will elaborate this further in my future post. For Short term trader taking advantage of the upcoming dividend, this strategy might be good to implement. However, two important things is a MUST to be known. First, The expected Dividend distribution month MUST be known so you can schedule the timing when you will start accumulating. I have a compilation of this anyway to help you shorten your time of your research, just check the DIVIDEND CALENDAR page of this site. Secondly, You MUST be aware of the previous quarter earnings of the stocks of your interest. You have to ensure that the company has a positive earnings otherwise the probability of distributing dividends is very less.

BUY ON DECLARATION DAY

Most of the time, the stock price rises from the declaration day up to the day prior to Ex-dividend date. For short term trader taking advantage of the upcoming dividend, this day may be the BEST time to enter. However, not all stocks rises as shown in the screen shots above.

SELL ON OR BEFORE THE EX-DATE

For short term trader, selling before the Ex-Date is always preferred as long as the profit is almost equal or more than the dividend yield since on the Ex-Date, stock price will most likely drops to almost same amount of the dividend. Let’s take a look on DMC. On May 16, 2014, DMC declares a dividend with a 4.11% yield. Let’s assume you bought a shares of DMC during closing on May 16, 2014. On May 20, 2014 (two trading days after dividend was declared), the stock price raises as high as 7.68% from May 16 closing. During this time, you may consider to SELL your position reaping a 7.68% return better than the 4.11% return from the dividend. However, If you really wanted to collect the dividend income but not planning to hold the stock for a long time, you may SELL on the Ex-Date (most likely with a loss but dividend income may compensate this loss anyway). If you could wait a little longer, I recommend to SELL your stocks few days (or weeks) after the Ex-date since the stock price will recover from a loss due to the dividends (you may check again the screen shots above and observe how the stock price recovers after the Ex-date).

CONCLUSION

Not all stocks have the same behavior/reaction to dividends. Nonetheless better to know how the particular stock perform on the dividends and respond accordingly. I recommend that you MUST have always a trading (or investing) plan before you execute in any of your future trading(or investing) decision and stick to the plan all the time. In this way, it is easy to modify and trace what went wrong or which one needs to be improved. Remember, it is your hard earned money. So, be responsible on all your actions.

Thank you for reading. May you have a consistent and profitable trades ahead!

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