I want to provide an outline of one of the strategies I use to find short term, dividend driven trading opportunities. I refer to it as my dividend swing strategy.
With high yield stocks there is a tendency for the investing public to buy before a stock goes ex-dividend to earn the high payout. Then, for those trying to game the system, investors/traders sell after the ex-dividend date to reap some sort of gain and put that capital to work in another opportunity. These investor goals have an effect on the share price that goes against what they are trying to accomplish.
What I have found is that in the weeks before an ex-dividend date, the share price will increase due to the buying pressure. Then on the ex-date, the share price falls by approximately the dividend amount, and over the following weeks the share price will fall even further as investors/traders bail out of the stock. What you end up with is a share price bottom which occurs sometime in the two to four weeks after ex-dividend and a price peak in the week or so before the next ex-dividend date. The price swings are often regular and of enough magnitude to offer trading opportunities.
Here are the stock characteristics that make for good dividend swing candidates:
- A high-yield. Currently I track stocks with yields in the 7.5% to about 10% range. That’s sort of the first “filter” or screen you should apply.
- A history of steady, even dividend payments. I am not looking for dividend growth here. This works great with stocks that have paid the same dividend for a period of years.
- A recognizable quarterly share price swing. Pulling up a two-year chart with ex-dividend dates provides a visual cue whether a stock exhibits the pattern described here.
- The BDC and finance REIT sectors seem to be the best place to find stocks that fit these criteria.
I use what has become a massive database to track quarterly share price valleys and peaks to get averages on how much share prices drop after ex-dividend dates and the average gain from the low. Right now I have nine stocks and two ETFs on my permanent watch list with two to three years’ worth of data on each. It is somewhat surprising, but average quarterly share price swings range between 7% and 10%. One benefit of this strategy is that with well-chosen entry prices the probability of suffering a loss is very low. I usually set target gains at 6% to 8%, with a two month holding period. You can boost these gains with the use of leverage in a margin account or the purchase of call options. (I know some of my 30 Day Dividends subscribers are using these tactics for very nice gains.)
Not every stock I track will provide a good entry every quarter. I keep refining my strategy and data, and look for three to four good opportunities each quarter. I will not make a recommendation unless the numbers really line up for a high profit potential.
The next time you’re looking for fairly reliable gains from the swing patterns of dividend stocks trying looking for the characteristics above.
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