Catching that Dividend and then Escaping with Your Capital
A while ago I wrote about what investors need to do in order be eligible for dividends so I’m not going to talk about that again. Instead, I want to talk about a new strategy that I’ve been trying when the opportunity presents itself and I have time to take advantage of it.
First, I look for high yield dividend paying stock that is very very stable. Some examples are Verizon, Vodaphone, and Telus. All 3 happen to be North American telecom companies. Price stability is very important in this strategy and they are usually stable because they pay regular dividends, increase regularly, and have a long history of paying dividends. Although they may fluctuate in price, they are much more stable than a lot of other stocks including the banks.
Second, look at the dividend ex-date. You must figure out how much time you have before this ex-date. We’re looking for at least 3 weeks time frame and no more than 8 weeks.
Third, look for market volatility. Lately, we have a lot of that so it’s very easy. However, going back to the first step, market volatility affects the higher risk stocks the most and the lower risk stocks the least. That’s why when the market is down a lot in the day, we call it a risk off day. Everyone is selling the higher risk stocks. The examples that I’ve chosen from the first step do fluctuate with the market but it’s relatively small.
For Verizon, they are a huge company in the United States but they have high growth in both wireless communications, high speed internet and television. Revenue is consistent every quarter because of their subscriber base that is mostly locked into contracts or have little turnover.
On the other side of the world, we have Greece and other European countries throwing a wrench or a grenade into global markets almost every few weeks but WHY would it affect the price of Verizon stock every time this happens? The reason is because Verizon stock is tied to a lot of other investment instruments such as ETFS, and mutual funds. When people sell these investments, they don’t care whether it includes Verizon or not. There are also a lot of traders that just dump everything as soon as the proverbial shit hits the fan because they’re traders, not investors. They’ll just buy back later or buy something else. They’re locking in their gains or limiting their losses.
The same goes with Telus. It’s a Canadian telecom company that has a growing smart phone subscriber base and a new television package that they are selling like hot cakes. How is company related to Greece, Spain, or Italy? It’s not at all but it is not immune from market volatility.
When a high yielding dividend stock approaches the ex-date, the stock will almost always move up if it has been oversold, and then move back down on the ex-date.
The fourth step is to buy the stock when you see that the stock price has gone down due ONLY to the market volatility and the ex-date is coming up in about a month. A month is the time that I try to use because it allows for enough time for the stock to bounce back but the range as I mentioned above is 3 to 8 weeks. Read all the available news for the company for the day that the stock has gone down before buying it. Since stocks like Verizon and Telus don’t really go down in price much, I usually scale in. I’ll buy a small number of shares first, and then buy again the next day to avoid buying it at price that is too high because we’ve seen how the market can drop almost 1000 points on the DOW in a week. We can’t know for sure when the bottom is but we are pretty certain that the stock price will bounce by the dividend ex-date.
The fifth step is to be prepared to hold the stock for more than 1 quarter. It might take longer to bounce back but at least you collect the dividend so you get paid to wait.
Verizon stock closed today at $38.35 but you can see that it has been in the $35.25 range quite often in the last 3 months. Telus stock closed today at $55.36 but you can see how it has fluctuated in the $51 and $53 range in the last 3 months. The dividend ex-date just passed on Dec 8th,2011, and you can see how the stock ramped up as expected as soon as the date got closer. Next time it goes there, maybe you can try this strategy. The capital gain is usually about 4 to 9%. The difficulty with this strategy is not only the timing but also the capital required. The more you put in, the more you get out of it. I usually invest at least $10,000, that will give me about 250 shares of VZ or 200 shares of Telus. If the stock goes up a few dollars, then I can have a gain of about $500. The key here is profiting from volatility with minimal risk and then escaping with your capital to invest in something else or at least not having it be at the mercy of this crazy volatile market.