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Today is the third part of a 5-day series on swing trading for interest, dividends and capital gains.

Or, the alternative title is How I’ll kill my brother if this doesn’t work strategy.

Part 1 talked about how the share price of a company drops on the Ex-dividend date. This drop is usually equal to the dividend in the absence of news.

Part 2 talked about how Exchange Traded Funds track indices, commodities, etc. Some ETFs also have dividend payouts but the drop in share price does not necessarily equal the dividend – because they track an underlying security.

Putting the concepts together, one can theoretically buy an ETF the day before the Ex-dividend date and sell it on the Ex-dividend date – pocketing the dividend and a capital gain in a 2 day turn around time.

Let’s look at an example.

I first mentioned ProShares’ Short and UltraShort ETFs during the market downturn in August.

Proshares’ Short tracks the inverse (opposite) of the Nasdaq-100 index while the UltraShort track twice the inverse.

I will only talk about the UltraShort.

Below is a graph that shows the UltraShort (QID) and another ETF, the PowerShares QQQQ. The QQQQ that tracks the Nasdaq-100 “normally”.

Notice that the QID is the inverse of the QQQQ and is amplified by a magnitude of 2.

Why would anyone buy the QID? If you believe there is a downturn in the market, you can use it to make money. Traders know how to make money when the market is good and bad.

Now lets look at the QID’s dividend distributions for the last 3 quarters.

UltraShort (QID)	Dividend ($/share)	Ex-dividend date	Record date	Payable date
3rd quarter	0.55061	9/25/07	9/27/07	9/28/07
2nd quarter	0.41585	6/26/07	6/28/07	7/2/07
1st quarter	0.34203	3/27/07	3/29/07	4/2/07

 

Now let’s examine the historical prices of the day before the Ex-dividend date and during the Ex-dividend date itself.

Remember, the basic premise is that I want to take advantage of the dividend and sell for a capital gain. As you can see, this is possible if you buy at (Ex-dividend date – 1)’s Low and sell on Ex-dividend date’s High.

3rd quarter

Date	Open	High	Low	Close	Volume	Adj Close*
25-Sep-07	40.63	40.68	39.03	39.03	24,706,200	39.03
25-Sep-07	$ 0.551 Dividend
24-Sep-07	40.78	41.05	40.05	40.77	22,951,800	40.22

 

2nd quarter

Date	Open	High	Low	Close	Volume	Adj Close*
26-Jun-07	46.50	47.39	46.31	47.32	25,279,100	46.68
26-Jun-07	$ 0.416 Dividend
25-Jun-07	46.68	47.60	46.10	47.16	27,594,000	46.11

 

1st quarter

Date	Open	High	Low	Close	Volume	Adj Close*
27-Mar-07	52.55	53.40	52.26	52.60	7,523,000	51.43
27-Mar-07	$ 0.342 Dividend
26-Mar-07	52.70	54.03	52.32	52.50	12,531,100	51.00

 

These three quarters illustrate that it is possible to receive a dividend and not suffer the consequences of a capital loss but a capital gain. Sure, this is a small sample but remember the “theories” of Part 1 and Part 2.

Can a trader always hit the Lows and Highs? Er, no, but there is the cushion of the dividend. As long as the dividend covers the difference and commissions (I won’t talk about exchange rates as this strategy is applicable to any market), you will make a profit.

I’ll expand on this strategy again tomorrow.

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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 1

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