Interest, dividends, capital gains – an all-in-one investment strategy, Part 1
moneyrelations :: Dec.17.2007
Hello, stranger! New here? How about subscribing to my RSS feed? Thanks for visiting!
This week, I’m going to put my money where my mouth is and do something that I have never done before – listen to my brother.
You know, the one that’s a day trader? If this doesn’t work, well, I’ll just have to kill him.
This is part one of a 5-part series on a comprehensive interest, dividends, capital gains strategy.
First off, let’s get some simple definitions down.
What are dividends?
Without getting too technical and bogged down on financial jargons, I’ll just say that dividends are monies issued by a company to its shareholders. The most common type is cash, which is why dividend investing is so popular amongst passive income portfolios.
Investors often buy blue chip companies because they offer a track record of safety in dividend payments. However, these stocks trade at a premium to those that do not issue dividends.
Let’s take a closer look at the characteristics of dividend paying stocks.
Assume a stock is trading at $10.00.
The company declares that it will pay $1/sh to shareholders on record at a specified date. Logically, this is called the Record date.
However, stock transactions take three business days to “settle”. Hence, the last day to buy the stock for its dividends is Record date – 3. The day after (i.e., Record date – 2) is called the Ex-dividend date because you’ve missed out on the dividend.
Everything being equal and in the absence of news, smart investors will only be willing to buy the stock at $9/sh maximum on Ex-dividend date. This is after taking into account the divestment of the $1/sh of company cash.
Therefore, there’s a trade-off between a dividend and a capital loss.
For instance, I am a shareholder on record of a stock that I bought at $10.00. I gain a $1 dividend but I also have an unrealized loss of the same amount. To be truly ahead, I will need to recuperate this “loss” at a future point in time.
But what happens if there is an investment vehicle that allows you to profit from the dividends but not at the expense of suffering a capital loss and even throws in some interest to boot?
Tomorrow I’ll explain more of this strategy.
Definitions, Investing, Swing trading ::
9 Comments »
Did you enjoy the post?
Subscribe to Money Relations and the Comments as well.
Share in Social Media
Related Posts:
- Interest, dividends, capital gains – an all-in-one investment strategy, Part 2
- Interest, dividends, capital gains – an all-in-one investment strategy, Part 5
- Interest, dividends, capital gains – an all-in-one investment strategy, Part 4
- Interest, dividends, capital gains – an all-in-one investment strategy, Part 6
- Interest, dividends, capital gains – an all-in-one investment strategy, Part 3
Thanks for the simple explanation break-down. I’m a bit of a financial-term illiterate, but I’m following ya. I look forward to the next part of your strategy explanation.
Thanks for coming for the ride, jblu!
Since I filtered it in my brain, I think the strategy is pretty simple to understand.
Even if you don’t employ the strategy, it’s still interesting to know how day traders do it.
proshares [qld] paid 5 dollars a share in capitals gains
http://messages.finance.yahoo.com/Stocks_(A_to_Z)/Stocks_U/threadview?m=tm&bn=55947&tid=...
So does this mean that for every share of QLD you own you lost 5 dollars a share?
Or does it mean that you get 5 dollars a share?
Hey Mariam, really good to see the buzz you’ve created with each and every article of yours. Look at the comments. Woo… And the fact you’ve made complicated financial issues an easy read makes me just want to click onto your articles… yes, that’s even though I’m an accountant by training and understands most of the terms you’re using.
Great job. Btw, I would love to subscribe to some of your comments so maybe you’ll like to add the plugin?
Cheers,
Ellesse
@ max
Interesting question because it confused me. This is good as I get to learn.
The QLD which you speak of tracks twice the performance of the Nasdaq-100 while the QID I bought tracks twice the inverse.
What confused me is that when I looked up the ProShares distributions, I first thought the QLD had a dividend of 0.07221, UNTIL I added up all the S.T. Cap Gain, L.T. Cap Gain which totalled $5.088. Hrm. So you call it a capital gain, I call it a dividend
It must be a Canadian/American tax law thing. Let’s just call it a distribution.
In any case, I bought the QID at $40.32 and it closed Friday at $36.95. If you add back the distribution of $0.47 I’m down $3.84.
You did give me something to think about with the QLD. The distribution was certainly unexpected given its previous quarters and it does illustrate that it didn’t drop $5 on Ex-dividend date. Still, it is a bit cost prohibitive at $100 /sh.
And it’s not as liquid as the QID. Not that QID is all that liquid to begin with. And in a volatile market…
@ Ellesse
Hah! Thanks. This blog certainly is helpful as sometimes I go back to read my own definitions. Seeing that I wrote them, they make all kinds of sense to me
I’ve never kept any sort of diary before so it has been fascinating reading my thought process at certain points in time.
And thanks for the suggestion of the comments feed. I guess it’s not prominent enough in the corner. I will add a link under my posts.
I actually won a blog design and he has delivered but there’s still some customization I want to do. But there just isn’t enough time in a day…
I’ve heard this before that – Derivative contracts are priced to reflect the underlying index yield and will not generate dividend income. Because ProShares invest in derivatives, they will not have dividend distributions that reflect those of their applicable indexes
there is another question that I have about these funds QID & QLD – especially the short ETF funds and that is does a dividend get taken away from a fund that is short some index.
If you are shorting a stock and a dividend gets paided, you have to fork up the dividend if you are a short holder.
Amd it appears that EFTs are paying dividends on the long side, my question has to be, do you loose a dividend by holding a short fund?
Example, did QLD holders loose a 5 percent dividend while QID holders gain one?
Hi Max,
Regardless of the ETF in question (or any company for that matter), if it declares a dividend and you are the shareholder of record, you will receive it on payout date.
This is central to the strategy. I had to know what the dividend was to evaluate the risks in the swing trade. In essence, I am “locking in” this dividend – I will receive it. The question now is how much I’d gain/lose from selling the shares.
[...] * Interest, dividends, capital gains – an all-in-one investment strategy, Part 1 [...]