Question regarding dividends

Discussion in 'Trading' started by Darshan, Nov 30, 2010.

  1. Darshan


    What am I missing?

    There are some stocks that pay out huge dividends +20% and more...

    I've noticed that like a couple weeks prior to ex-dividend day the stocks will rally... makes sense, in anticipation of the ex-div people want to get their hands on a juicy dividend.

    And once they do... the stock drops.

    My question is why not get into the stock before the run up before ex-dividend day? They always do... and then either hod on and grad the dividend or just simple sell before the ex-div day.

    It seems like a no-brainer, thats why I'm feeling that I must be missing something.

    Perhaps someone can shed some light
  2. Different traders/investors can have different objectives and different tax consequences on capital gains and dividends. What can be "good" for one trader/investor isn't good for another. :cool:
  3. Darshan


    Yikes! Just read my post. My apologies about all the misspellings, etc.

    So your essentially saying that it is free money?

    The stock rallies before ex-dividend day to collect the dividend. That is free $$$?

    Not buying it... Anyone else?
  4. In the perfect world, the value of the stock at the close before the ex-dividend date will be equal to the value of the stock plus dividend when it opens on the ex-dividend date. But of course, we don't live in a perfect world. The ordinary vs. capital gain tax issue is just one example.

    Perhaps the run up you are seeing is just after the dividend announcement. A 20% dividend is indicative of a company that the market thinks will either cut or eliminate their dividend. So the announcement of the regular/full dividend is a surprise and results in a run up.

    An observation I have made is that some stocks drop significantly more than the value of the dividend immediately after the dividend is earned, only to recover much of this loss over the next few days. But their are too many other variables involved. So my recommendation is to not play this game unless the company is one you're willing to hold as an investment should you not get the expected result.
  5. obvious free money laying out there and nobody else has noticed it? think about it.
  6. jharmon


    Think it's an edge?

    Backtest it!
  7. trade it with whatever share amount is minuscule to you and see what happens.
  8. timcar


    Dividends are good.
  9. lindq


    First, it is a bad idea to use the word 'ALWAYS' in the context of trading. Nothing always happens.

    Famous last words: "Well, Bob. It always happened before."

    Second, you can assume that 100,000 other people in the past 50 years have looked into dividend capture strategies.

    There is no edge there, because all news is already baked into the price.

    Dividends are nice. But it isn't a tradable event that you can consistently profit from.
  10. jharmon


    I disagree with the last sentence.

    All you need is an edge that few others have spotted or arbitraged.

    eg. Rather than just look at all dividends, maybe you look at a subset of stocks paying dividends, consistent historical dividends, trending stock, trending market, in a large cap index, possibly with other fundamental factors such as earnings, earnings surprises etc.

    You might also factor in a spread trade too to arb differences in treatment between options, single stock futures, CFDs etc.

    Just gotta find the edge, test it and trade it methodically (and know when it's broken).
    #10     Nov 30, 2010