Interest, dividends, capital gains - an all-in-one investment strategy, Part 2
moneyrelations :: Dec.18.2007
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Today is part two of a 5-part investment strategy series that involves day trading for interest, dividends and capital gains. Or, subtitled, How I’ll kill my brother if this doesn’t work strategy.
You can read part 1 here.
Yesterday, I briefly explained dividend terminology. I also explained that on Ex-dividend date, the share price of a company usually goes down based on fundamentals. The market takes into consideration the effect the dividend has on the company.
But, is there such a… thing that would trade higher after a dividend payout in the absence of any news?
How about Exchange Traded Funds?
From Investopedia, here is the definition of an Exchange Traded Fund:
A security that tracks an index, a commodity or a basket of assets like an index fund, but trades like a stock on an exchange, thus experiencing price changes throughout the day as it is bought and sold.
As mentioned, some ETFs track indices and they can distribute dividends too. However, the price of an ETF does not necessarily drop on the Ex-dividend date by an amount equal to the dividend.
Interesting…
So now there is the possibility of pocketing a dividend and selling for a capital gain should the share price go up.
Tomorrow, I will explore how to earn dividends and capital gains from the same investment in just two days.
With this prep, you know it’s going to be an ETF.
Definitions, Investing, Swing trading ::
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wait a minute. wait a minute. I gotta catch up. Is it a Given that the dividend-producing company’s share price goes down by a dollar, just because the day before it gave out a dollar? Does that actually historically happen? And even if it did, well, why not just ‘buy and hold’ because within a month (or however long) it will have earned that dollar back again, presumably to be shared out in the next quarter?
I’m dubious about this plan. I think it’s time to kill your brother. (wait a minute. you know how You can Say Something about your family, but Nobody Else Can Or Else? Does that apply here?)
No, Nancy. Based on the absence of news.
Seriously, if a stock sold at $10 today, and tomorrow it gave out a dividend of $1, would you still buy it for $10 the day after? Why would you do this if there’s no news?
Why not buy and hold? You answered that question yourself. How long will it take? Do you know for sure the company can earn it back?
Look at Biovail. It distributes dividends and has a yield of over 10% and look at how far share price has fallen in the past year. And just because a company distributes dividends does not mean it’s profitable.
I’m not saying buy and hold (forever) is bad. This is just a day trading strategy.
So the theory is that share price does drop on Ex-dividend date (I know I would price in the dividend that was just given away - to other people not named Mariam). Since ETFs track the indices, share price doesn’t necessarily drop because of the dividend.
I’m dubious as well.
All I can suggest is try it in a simulator (or do some play trades on an a spreadsheet) and see how it goes. Mind you this isn’t the type of strategy where you are likely to lose much money.
I can see your point about the strategy but I don’t think it’s going to work. An ETF may “track” an index but it’s still a freely traded security so if investors think it’s worth more because it has more cash (from recent dividends) then the price will get bid up. After it goes ex-dividend the price should go down (barring any other market influences).
Mike
p.s. - I’m skeptical about everything so don’t let me discourage you. It might be a fun strategy to try.
Hmm… we’ve ETF here in Singapore but it’s not as actively traded, very much affecting it’s liquidity. But a lot of people do see it as a alternative to index funds which sadly isn’t popular here. Due to the fact that it’s still more expensive than the Vanguard funds you’ve in the US. Geez, aren’t you guys lucky!
Cheers,
Ellesse
I actually didn’t know you were in Singapore, Ellesse. I’ve been there, beautiful country, very clean. I had breakfast with an orangutan
Or… had breakfast and had my picture taken with her.
I wonder why ETFs aren’t popular in Singapore… From what I remember, it’s a financial hub, no? You’d think any kind of investment vehicle, people will be trying to make money off of it