Tag Archives: equities

Testing Whether You Can Buy Shares the Day Before A Dividend is Earned and Sell the Day After

Posted on by

A few months ago I pompously dismissed the suggestion that you can buy a stock the day before the dividend is earned and sell the day after without ever testing the idea. Recently I ran a test.

How I Got Suckered

I made the mistake of looking at the ex-dividend dates of several reliable, high paying, blue chip stocks at the same time. They were all spaced 5 or more days apart. So in theory, you could buy one stock, hold till it went ex-dividend, sell, buy the next, rinse and repeat. You could invest the same money about 4 times in one month and pick up 4 quarterly dividends ranging from 3.5%-5%. Sounds cool right?

Now of course the price for a stock will drop by the same amount as the dividend payment as soon as it goes ex-dividend. But these stocks, though blue chip, are highly traded. You could see that historically they bounced around more on a weekly basis than the amount of the dividend.

So they should bounce right back up in price, right?

(Sucker!)

Where I Went Right

I chose to make the test using BCE. Ma Bell pays a dividend of over 5% and is a strong large blue chip company. (So was Nortel.) If the market was to collapse tomorrow, BCE would probably recover within 5 years, which is before I need the money from the test account.

Where I Went Wrong

I got greedy. I bet the farm, the wood lot, the mineral rights, and the guinea pigs.
Instead of running the test with one share or even one hundred shares, I bet 1035 shares.
Between the two sales commissions and the fact you’d only get a quarterly dividend it didn’t seem practical to invest a small amount for the test.

And yes, I could have just kept track of the stock price on paper. In fact, that’s what I really did. Honest. I didn’t try to juggle acetone peroxide detonators with my bare hands. What’s that? Oh I’ve always been short a finger on that hand.

So when the shares tanked I had no cash to play with in the account. If a harsh market correction had occurred, if I’d had a good chunk of cash, I could have bought shares in defensive stocks (or a low MER full-market ETF) and as it rose in value again, I would have had something to counterbalance the massively overpriced BCE shares.

Like many people who lost their savings when bubbles popped, however, by buying all at once near the top, I risked having to try to hang tight for years with no profit hoping for a rebound. Not a way to sleep comfortably at night—for years.

Where I Got Lucky

It is purely luck that the stock market headed the direction it did and within two months brought the BCE share price back up to the price at which I made the purchase. If I had bought these shares in say early 2008, I could have had a very long wait to see the numbers flip back into the green on my investment.

Remember, people in 2008 didn’t see the market crash coming either. It’s like when a transport crosses the grassy median between the lanes on the 401 on a foggy morning: You can’t see a market collapse coming before you’re staring into the headlights of a big rig coming straight at you out of the gloom at 110 km/h.

I was very lucky. Like Lucy, I nearly had some s‘plainin’ to do to my husband. (I did confess, of course, already. What can I say? He plied me with chocolate.)

Unfortunately, most of us are not lucky all the time. Or even more than half the time. (I do know some people who are unlucky more than half the time, though.) I don’t think I’ll push my luck and try this ever again. Even if BMO is about to go ex-dividend April 29…..

What Happened to the Share Price?

  • I bought on March 10.
  • On March 12 BCE went ex-dividend.
  • Then it began to plummet.
  • On April 2, I gave up and sold half of my position for an overall profit but at a price per share lower than I had paid for the stock. (e.g. the dividend for those shares would offset the capital loss)
  • On April 15 the stock returned, very briefly, to the price I had purchased it at.
  • On April 16, I received the dividend payment.
  • On April 17, the stock climbed enough above the purchase price to sell the rest of my position and break even on the capital cost plus the trading commissions. I ended up with a total event capital gain of $0.20 and the entire dividend.

Was It Worth the Stress for Over a Month?

No. There are much calmer ways to make $600. Like working as a pothole repair person on the 401 in the middle lanes near Toronto.

Is Any of This True?

Right now you may be wondering whether this article was posted on April 1.

All I’ll say is it should have been.

Related Reading

Join In
Have you ever invested way too much in one stock only to live the life for the next few weeks of the 12-cups-a-morning caffeine addict who can’t get anything stronger than a cup of herbal tea? Please share your words of financial hindsight wisdom with a comment.

What Canadian Blue Chip Stock is Paying a Dividend Only Yield of 17%?

Posted on by

I hope to fund part of our retirement costs with dividend income. That’s led me to invest in a few dividend paying ultra-low risk stocks over the past few years. When I bought each position, I thought about the dividend yield it was offering and whether it seemed reasonable compared to the interest yields available from fixed income investments. One thing that became obvious was that dividend yields tend to be fairly low at the time of purchase considering the amount of risk you’re taking by investing in the stock market. I do own one blue chip stock, though, that is currently paying me a dividend only yield of 17%.

Percentages Can Be Deceptive

One thing I’d like to warn you is that you can’t live off percentages.

You may have a stock that is paying you a 7% annual dividend. That sounds great. Your bank account is probably only paying you 1.35%. And your one-year GIC is probably only paying 1.65%. At 7% you must be cruising, right?

Well it depends on how much money you have invested at that 7% yield. If you only have $1000 of that stock, your actual take home income is $70 a year before taxes. It’ll pay the high speed internet bill for one month, but it won’t pay the winter’s natural gas bill.

What Is the Real Percentage Yield?

I started this by mentioning I have a stock that’s paying 17%.

It would be more appropriate to say it’s paying $336.53 a year.

The percentage yield is very deceptive.
The initial investment in the stock was $1946.25.
In theory, that could mean the dividend yield for this stock is 17.2912%.

But is that realistic?

Present Day Dollars are Not the Same as Past Dollars or Future Dollars

To calculate a more realistic yield, I think I would have to change the value of the initial investment into “today’s” dollars.

For example, if I spent $1000 on January 1, 2012, that would be comparable to having spent $1012.38 on January 1, 2013. I could have purchased more for the same money a year ago because inflation was less. Or I could have purchased the same amount a year ago for less money because inflation was less. (I used the Bank of Canada Inflation Calculator for this example.)

So what would the cost, $1946.25 be in December 2013 if I had to buy those shares then?

According to the Bank of Canada calculator, it would have cost me $2880.64 to buy the same shares in 2013 that cost me $1946.25 all those years ago.

Out of curiosity, I also poked around the internet and found a couple of US inflation calculators.

According to data from Oregon State University and a calculator at http://www.davemanuel.com/inflation-calculator.php, if I was talking USD, the $1946.25 would be $3338.34 in 2013 dollars.

According to the calculator at http://stats.areppim.com/calc/calc_usdlrxdeflxcpi.php, it would be $2997.53 or using CPI data $3 325.39.

Why is there a difference? Because it depends on what values you use for the inflator/deflator.

The actual value doesn’t worry me too much. What I’m trying to point out is that the dividend yield would be more realistic if I divided the payment of $336.53 by $3 338.34, not $1946.25.

So what is that reduced yield? 10.08%

Why It’s Worth Buying Dividend Paying Stocks That Routinely Increase Their Dividend

The yield of 10.08% on this stock is still pretty good.

If I bought more shares in the exact same company today, I’d only get a 2.22% dividend yield.

At the time the first dividend was paid a few years after the shares were purchased, the yield was 0.15%.

You can see that the dividend has increased significantly over the years. In fact, unless I’m screwing up my math again, it has increased faster than the rate of inflation.

If a stock increases its dividend at a rate greater than inflation, and if I buy that stock when the dividend yield seems reasonable, then I consider the purchase to be similar to buying an annuity. Provided I keep that stock (and the company continues to prosper) I can receive a steady income stream that keeps up with or exceeds inflation.

Obviously buying stocks is much more risky than buying an annuity:

  • any company can fail
  • a dividend can be reduced or eliminated without warning
  • a company can decide to stop increasing a dividend without warning
  • if you sell shares of a company you can lose capital

However, unlike an annuity, my money is not actually locked in. If I pay attention to the business fundamentals for the company, and if I’m lucky, I can sell a stock that begins to under perform and buy something else. I may lose capital by doing this!

On the upside, though, I may also find my stock appreciates in value. If so, I can sell part of my stock and use the capital gains to invest elsewhere or to spend. (Of course if I sell the stock I will stop receiving the dividend: it’s that Goose that lays the Golden Eggs thing all over again.)

Is Buying Dividend Paying Stocks a Good Retirement Plan?

I honestly don’t know. It’s part of my strategy but certainly not all of it. I have

  • a big chunk of money in fixed income (and because I am extremely risk averse it is a very big chunk);
  • another big chunk of money in “buy the entire stock market” ultra-low fee ETFs
  • a small amount of money in individual dividend-paying ultra-low-risk stocks

At this point, I would say only my future “vacation for a week somewhere further south than Timmins” retirement money is invested in individual stocks. I can forgo the annual vacation in retirement if I have to. I can’t forgo eating.

Related Reading

Join In
Do you invest in individual companies that pay a steadily increasing dividend to investors? Do you ever check what your “real” yield is? Do the dividends help fund your retirement or do you hope they will some day? Please share your views with a comment.