Ex-dividend trading strategy




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Ex-dividend trading strategyEx-Dividend Trading Strategy

Dividend Defined

Dividends are the portion of a company’s profits which had been apportioned for distribution by the company’s board of directors to the company’s shareholders. The dividends distributed can take the form of cash, property or stocks. Dividend returns can be quoted in terms of how much money each share received (Dividend Per Share) or as a percentage of the stock’s current market price (Dividend Yield). Dividends are often paid out by blue chips companies as an attempt to compensate shareholders for the lack of movement in the company’s share prices. This contrast with high growth companies which tend to invest most of their profits in order to help them to sustain their growth rate.

There are basically two approaches towards implementing a dividend based trading strategy. The first approach is geared towards those traders looking for short term gains. The second approach is for those traders with a longer term perspective towards stock investments. The dividend trading strategy which we are going to discuss in this article will focus on the short term approach

Ex-Dividend Trading Strategy

The short term approach toward dividend based trading is known as the “ex-dividend trading strategy”. It is sometimes also known as the dividend capture strategy or dividend stripping strategy. Since most companies pay out dividends several times a year, the ex-dividend strategy is a good trading strategy for a trader who wants to capitalize on dividend opportunities without having to hold stocks for an extended period of time.

Record Date Payment Date

Before implementing the ex-dividend strategy, some research into high dividend yielding stocks is required. In addition, traders need to take note of two important dates, the record date and the payment date for the dividend yielding stock. Dividends are only paid on the payment date to the holder of the stock whose name is on record on the record date.

Qualifying For The Dividend

Stock transactions normally take three business days to settle. In order for a trader to have his name on record as owning the shares, the transaction must be done three days prior. Hence, if a trader wants to qualify for the dividend payment, he needs to purchase the stock at least three days before the record date.

Stocks purchased two days before the record date is considered “ex-dividend” and the new owner of the stocks is no longer entitled to the dividend about to be paid. In other words, the trader actually just needs to hold the stock on record for just a single day and sell the stock one day after the stock goes e-dividend to earn the dividend.

Theoretically, traders will be deriving a net return on their investments due to the dividend payout. However the reality is very much different. Stock prices generally tend to rise by the amount of the dividend payout on their announcement date. This has the effect of offsetting the gains that traders were supposed to make. This problem can be overcome by studying the past history of the stock movements prior to the dividend announcement to see how the share prices moved before.

Dividend Calendars

To get an idea of when companies are going to a payout their dividends, traders can rely on the use of dividend calendars such as the ones provided y Nasdaq or Reuters.

Nasdaq Dividend Calendar

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