Buying, Catching, and Chasing Dividends
Whether you’ve heard about these terms, “buying”, “catching”, or “chasing” dividends, they all mean the same to me. This is about buying a stock at the right time, for the main purpose of receiving a dividend payout. This is not an easy thing to do because everyone knows about it and there are drawbacks. The main drawback is that the stock usually drops immediately after the date that you have bought it. First of all I must warn you that I haven’t been doing this for a long time but I’ve put together a summary of my strategy that I try to stick by.
What is the right time to buy?
You must buy before the Ex-Div date and you can only sell it on the Ex-Div date or later to be eligible for the dividend. Your purchase then settles by the record date and you are then on the list of owners to be paid. As the date gets closer to the stock’s Ex-Div date, it may experience a run up in price. For this reason, you may want to buy it on a dip as it is running up. If you bought in really early, you may actually want to sell on the day before the ex-div date for those capital gains and forget about the dividend.
- Since not all dividend dates are the same amongst companies, the cash you use to buy one dividend can be used again for another dividend from another company. This effectively increases the number of dividends that you receive in a year with the same amount of money. Investors who do not trade regularly usually keep their money in dividend pay funds, or ETFS, or individual stocks for the entire year which means their money will usually be paid 4 dividends per year from each company.
- Reduces your exposure to stocks
In times where the market is going down or is very volatile, you won’t have all your cash stuck in the market because you’ll be instead waiting for the right time to buy that dividend and then you get out as soon as you can for about the same price that you bought at.
- Tax purposes
Dividend payments are taxed less so you get to keep more of it.
- Short term investing
If you need your cash for something else, you can still get into the market and get out
- Risk of losing
- Requires active investing
Here are the 7 major attribute that I would look for in a stock as a potential candidate for dividend buying:
- The stock doesn’t drop on the Ex-date or if it does, it should bounce back in the short-term(i.e. less than a month). If the stock drops and you have to hold on to it or sell it for a loss, there is no point in trying to buy its dividend. However, often times even if the stock does drop initially, it may bounce back quickly and that will be your opportunity to cash out. There are also some stocks that occasionally go up on the ex-div date but that is rare
- Bull market – typically if the market is trending upwards, there is less of a drop, and more potential for capital gains in addition to receiving its dividend. This would especially be true for faster growing companies.
- A company with strong fundamentals
If I’m going to be stuck keeping a stock in the short-term, at least I’d like to know that there good long-term potential for capital gains.
- Company has declared the dividend or you must be confident that dividend will be paid
The company should have declared the dividend prior to the dividend being paid out and there is nothing in the air that would have you doubt that it will be paid if they haven’t explicitly declared it.
- Recurring dividend
The dividend will be paid again in the next scheduled opportunity, i.e. next quarter, next month, etc. as opposed to a one time payout. One time payouts are too risky unless you’re planning on holding the stock for the long term in which case you’re not actually buying it for a dividend in the first place. Hot Topic Inc. as I mentioned is one example where a one time dividend payout did not work out well for investors who did not get out in time.
- Low commission fees and significant capital
Don’t do this if you’re not going through a discount brokerage or you’re not using significant capital. You might end up losing money due to commission. It’s too much risk for too little.
- Significant dividend yield
In my opinion, good dividends are ones that pay more than you can make on any interest investments such as high interests CDs/savings accounts at US banks( GICs at Canadian banks). Right now I’d be interested in any dividend yield more than 4% per year but I’ll always do the math to make sure it’s worth doing.
Here is an example to further illustrate a potential candidate. As of today, the dividend yield for Verizon (VZ) is 7% and it pays quarterly so that works out to 1.75% per quarter.
You can review their history of dividend payouts:
Then you can check what their historical prices are at Yahoo.
Then you can look at the chart to see how the stock behaves after a the ex-date.
You can see that the stock drops on the EX-Date every time, but when you look at the chart, the price bounces back within a month to the price you can safely sell at or above the price that you bought it at before the Ex-Date.