Trading dividend stocks is a bit different than trading volatile stocks, forex, or futures. Because dividend stocks are more consistent and less volatile, it can prove difficult to gain momentum when day trading them. But there are some techniques you can use to maximise your profits.
There are 3 strategies you can use to trade dividend stocks:
- Dividend Arbitrage
- Dividend Capture
- Ex-Dividend Date Trading
As I said above, day trading dividend stocks can be a low yielding process, as dividend stocks are historically less volatile than other assets. There are only certain times throughout the year when dividend stocks fluctuate enough to make trading them worth it. All of these strategies are based around those specific periods.
Using the Ex-Dividend Date to Day Trade Dividend Stocks
The strategies in this section are all based around the ex-dividend dates of companies.
By leveraging the dividend against the share price, you can possibly make a gain in asset appreciation, but also you have the benefit of earning your dividend by purchasing the shares at the right time.
What is the Ex-Dividend Date?
The ex-dividend date of a company, (which is also known as the reinvestment date), is the reporting date for shareholders. If you own shares in a company prior to their ex-dividend date, you become eligible to receive a dividend from the company for that payment period.
Because there are a lot of people that want to get the dividend, but don’t really want to hold the stock for an extended period of time, it creates a lot irregular volatility in share price.
By using the ex-dividend date to our advantage, we can day trade dividend stocks to make a nice profit from holding a stock for a couple of days.
When is a Company’s Ex-Dividend Date?
Each company will have a different ex-dividend date, so the first process before investing in a company is to find out when the ex-dividend date is for the company, and when the dividend is actually paid.
Usually, companies will have 1 month between ex-dividend dates and payment dates. However, it is becoming more common to only have a few days between them.
So, before trading, you need to make sure you know when these dates are.
3 Strategies for Day Trading Dividend Stocks
These strategies only work when executed correctly. Please do your own due diligence before investing.
#1. Dividend Arbitrage
The reason behind dividend arbitrage is to hedge against the drop off in price after the ex-dividend date.
Basically, the share price of a stock increases as it reaches the ex-dividend date… Then when the ex-dividend date passes, the share price drops by a similar amount as the dividend payment.
This trading strategies requires you to purchase shares in the company before the ex-dividend date, to become eligible for a dividend payment. After this you buy a ‘put’ option of equal value to the shares you bought, so you are protected against the downside of the share price falling.
You can do both of these things by using eToro, the commission free broker. Capital at risk, 66% of traders lose money.
Worked Through Example of Dividend Arbitrage
Here are the particulars about the company:
- Company ABC is trading for $90 per share, and offers a quarterly dividend of $2 per share.
- There is a ‘put’ option available with a strike price of $100 costing the buyer $11 per share.
The first step is to buy our shares, let’s say we buy 10 shares at $90 per share… Total cost of the shares is $900.
And we buy the same amount of put options… 10 put options at $11 per share… Total cost of put options is $110.
The total cost of the trade is $1,010.
Once we pass the ex-dividend date, we exercise the put option & sell our shares. Because the dividend will be taken out of the share price our estimated share price upon the sale of the shares is $88 per share.
The gains from the trade can be calculated:
- Sale of the shares: $880
- Put option exercised at $100 per share strike price: ($100 – $88)*10 = $120
- Dividend received: $20
As you can see the total gain from the trade is $1,020. Making the trader a $10 gain.
To learn more about dividend arbitrage, check out my full article on the trading strategy. And for more information on Stock Options check out Biz-Minded.com which is the best article I’ve found on the topic.
#2. Dividend Capture
The price volatility of dividend stocks around the ex-dividend date means big opportunities are available for short term traders.
For this strategy we are looking for companies that are either announcing new dividends, or an increase in dividend. This way the price should boost along with the announcements.
There are 4 main dates you need to keep an eye out for:
- Dividend announcement date
- Dividend Declaration Date
- Ex-Dividend Date
- Dividend Record Date
When a company announces a dividend, this is your notice to keep an eye on the share price. Usually when a dividend is announced the share price will jump roughly the same amount as the dividend amount.
Once the hype has settled, the price will relax back to a sustainable level. This will usually be just before the ex-dividend date. This is when you buy your shares.
When the ex-dividend date hits, people buy shares to claim the dividend, resulting in a boost in price. This is where you sell your shares.
Worked Example of Dividend Capture
In 2011, Coca Cola (KO) was trading at $66.52, on the 28th April, the company announced a dividend of $0.47 per share for the quarter, and the price boosted to $66.93.
The volatility that followed over the next 6 weeks due to the boost in price resulted in Coca Cola trading at $64.94 on June 10th 2011, this was an ideal buying point for investors.
On June 13th 2011, Coca Cola’s ex-dividend date occurred and the dividend was declared. The price shot up to $65.12 per share. Which is a great exit point for the trader.
The trader might not be eligible for the dividend, but the gain made on the trade would cover the dividend payment, as well as not having to hold shares for too long.
Just think… If you had bought 100 shares of Coca Cola on June 10th 2011, then sold on June 13th inline with the strategies timeline. You would have netted $18.
A way to increase gains from this strategy is to buy call options rather than the shares. That way you can lower the cost of the trades but still yield the same returns. You would buy call options meaning if the share prices increase, you gain money as a percentage of your contract. However, this is a riskier way of investing.
#3. Ex-Dividend Date Trading
This trading strategy will be more long term than the other two. You will possibly hold the shares for up to 3 months. This is why, this strategy only works with companies that have solid growth and consistent dividends.
Even though this is a long term trading strategy, it is the simplest of the strategies outlined above. You basically need to buy the stock after the ex-dividend date, and wait for the price the bounce back after the post-dividend drop off.
When the ex-dividend date passes, the share price for a stock drops the same amount as the dividend value, to account for the dividend being paid. Also, that mixing with the volatility of shareholders selling because their dividend is secured leads to a notable drop in price… But not in value!
This drop is because new investors that buy after the ex-dividend date are not entitled to the dividend payment, so the price reflects this.
Worked Example of Ex-Dividend Date Trading
Company XYZ has a share price of $50, and a quarterly dividend of $0.50.
After the ex-dividend date, the share price falls to $49.50 per share, and you buy 10 shares.
As we approach the next ex-dividend date, more investors will buy to claim next quarters dividend payment. This will bring the price back up. If the company has a history of strong earnings growth, and dividend growth, this will only create a better trading opportunity.
For this example, we will assume the dividend stays the same, and the share price will reflect that. Upon the next dividend declaration the share price will boost the value of the dividend. So the share price will once again become $50 per share… This is where you would sell your shares!
Overall, from a 2 to 3 month trade, you would have gained $5. Obviously, the more shares you can afford to buy, the more you will gain.
Why Does Dividend Stock Trading Yield Low Returns?
By now you must be thinking, I’m only going to gain $5 to $20 from the purchase of 10 shares of dividend stocks!!!!
Unfortunately, because dividend stocks and stable and don’t tend to be very volatile, you can’t make a lot from day trading dividend stocks. Dividend stocks are much better for long term investment, so you can reinvest your dividends and gain compound interest.
The strategies above are simply the best day trading strategies for dividend stocks. They are the safest and most well known ways to day trade dividend stocks.