Valid Dividend Scalping Strategy ?!

[ekiwi]

Hi All,

Quick question, or rather an idea I'd like to get others thoughts on.
Been reading a lot about 'Dividend Capture Strategy', you know where you look for companies who have announced a special dividend, and jump on board to secure the one-off payment, then sell ex-dividend.

I like the theory, on a stock like Wynn for example which recently paid out a $6 US special to shareholders, the potential is there to make a significant profit. HOWEVER most people are no doubt aware that the day after the last day to officially buy (ex-dividend date) the price always drops by the amount of the dividend. Sell before the date and you don't get the dividend, sell after and there's not gonna be a profit on the trade UNLESS the stock goes up again.

As an alternative I started to think about a different strategy where perhaps you buy stock on or around the day of the ANNOUNCEMENT and sell just before the close on the day before the ex-dividend date. You DON'T get the dividend but you've very likely made a tidy profit as people scamble to get on and get the dividend thereby driving up the share price.
THEN having sold your position, you could go a second bite and SHORT the stock at the close that same day. The stock is sure to open the next day down by the amount of the dividend - close it out just after the open for another excellent quick profit.

Now I'm not recommending this at all but everything I've read and examples I've checked suggest this strategy 'could' be pretty solid. Can anyone see any problems or recommend other things to consider? I'm thinking it's something I'll only employ where companies post a dividend of at least 2% of the share price - to make it worthwhile.

If you look at the Wynn example (or ANY recent sizable dividends) this seems to work out VERY nicely.

I am a relative novice though so very very interested in what more seasoned players might think.

Cheers,

ekiwi.

 

[grantx]

Kiwi,

It's more than likely the price of the stock will adjust to reflect the div yield, ie at a minimum, the yield will not be significantly greater than the risk free rate of return (on a bank deposit, for example).

Moreover, as it will (presuambly) be an interim or final dividend, either will be less than the total annual dividend (not sure if that's relevant in this particular case).

Also, youve got dealing costs - in and out - to take into account.

Grant.

 

[ekiwi]

Hi Grant,

Thanks for the reply. Not sure I get the gist of your msg though. I've found plenty of co's who've been offering up dividends (special one-off and quarterly) of more than 2-30%, -usually greater than $1 a pop. In these situations if you're able to spring for say a thousand shares the return is much better than you'd get by sitting on your money in a high interest bank deposit for a year or more. Esp when you cinsider the short term nature of such a trade allows for multiple strikes.

If we take a typical example of company X paying $1 - against a purchase price of $24. I buy 1000 shares on the announcement (leveraged buy using CFD's perhaps so minimal capital req'd).
In the lead up to the ex-dividend date the sp rises to $25 (conservatively) I sell at the close on the day before I'd be entitled to the Dividend, for a $1000 gross profit (fee's and interest to be removed). Immediately after I short 1000 shares at $25 only to close the position the next morning when the price drops to reflect the div yield. Now $24. Again $1000 profit.

Total profit $2000 less interest and fee's (say a generous $300). Net $1700 (US).

Found a site that alerts me to upcoming dividends paying over 2% of the current sp and time and time again these behave exactly as expected. Up in the run-up, then down by the amount of the Divvy the day after.

Interestingly they sometimes they regain the amount they dropped ex-dividend in the days that follow but holding these stocks isn't part of my plan. If you did enough DD and felt comfortable that the co. was a growth stock then a traditional Dividend Capture strategy affords a far greater potential for profit - allowing you to get the dividend and ride the stock back up before selling - but I don't like the risk/timeframes involved.

Most everything I've read focuses on capturing the dividend but I'm really leaning toward being in and out before and after. Seems much easier and safer, and very profitable. Anyone have experience with a similar strategy, because it almost seems too easy - in theory

Cheers,

ekiwi.

 

[grantx]

Ekiwi,

I just find it surprising that these situations exist. For example, for the FTSE 100 stocks in the UK, the yield is probably around (guess) 2-3%, ie less than the interest your money could earn in the bank account. As dividends are generally paid twice a year, then the interim or final dividend is always less than the total dividend, ie roughly half or 1-1.5% yield. So with these figures, you won't make any money with your approach.

Where a dividend yield is considerably higher (like your examples) it is usually due to the share price taking a dive since the last dividend was paid because of a profits warning, drop in earnings, etc. Meaning the dividend is not expected to be maintained or will be reduced.

If this is possible in New Zealand, why aren't the prices considerably higher in anticpation of the dividend? After all, earnings, dividend forecasts, etc and therefore dividends are usually known far advance.

If the dividend was expected to be maintained the price would recover accordingly to reflect the anticipated dividend. If a stock is yielding anything over say, 5%, everybody would pile and the price would be driven up to a level whereby the yield is comparable.

If you can do it, then good luck, mate.

Grant.

 

[ekiwi]

Heya Grant,

"If the dividend was expected to be maintained, the price would recover accordingly to reflect the anticipated dividend. If a stock is yielding anything over say, 5%, everybody would pile and the price would be driven up to a level whereby the yield is comparable".

You got it in one mate. If you look at the graphs for US stocks like SKS, WYNN, CUZ, RWT (to name a few recent examples) you'll see the price rose dramatically following announcement of a 'special dividend' then reduced on the day after registery closed by the amount of the dividend. To me this implies that if you get in 'around' the time of the announcement ride the stock till the last day where people can get on board then sell, and then possibly short ahead of the ex-dividend price correction ...you'll be laughing twice over

I've mainly looked at US stocks where apparently the no. of co's announcing special dividends is up 9% compared to last year. Seeing about 4 a week at the mo.
Hope this is of interest to others?

All the best,

kiwi.

 

[grantx]

Kiwi,

You may find the market-makers have already raised the price before you can hit the "buy" button. They'll raise the price for two reasons.

The first is in anticipation of a surge in buyng (and if buying persists, they'll keep rasing the price until demand slows or stop).

Now, assume the best interest rate on a bank savings account is 5%. If a stock is priced at 100 with a dividend of 5, the yield or return is also 5%. Therefore, people will be largely indiffent as to where they place their money - the bank or in the shares (we'll ignore the potential greater risk of the shares for simplicity) .

If the company announces a special dividend of say, 10, giving a yield of 10% (5% more than the bank account) then people will buy the shares from 100 up to the point where the yield advantage (I think a yield advantage is called a "yield pickup") disappears.

At 100, div of 10, yield = 10% (5% over bank yield);

At 150, div of 10, yield = 6.6%

At 175, div of 10, yield = 5.7%

At 200, div of 10, yield = 5%, ie the same as the bank. At this point people will have no incentive to buy and market-makers will not be able to sell.

The price may subsequently drop not only because of the ex-div affect, but also because the market-makers may be running a large short book which has to be covered. As the price begins to fall, the m-m's hope this will stimulate profit-taking, thus coverng their positions.

If you still say you can do this, it is a good strategy. The yield figures above are per annum. If you can get the div for a good yield in a very short time, then on an annualised basis, you should be quids-in. Just be aware of the m-m's - they're quick.

Grant.








I hope I'm wrong

 

[MarkSA]

To me this implies that if you get in 'around' the time of the announcement ride the stock till the last day where people can get on board then sell, and then possibly short ahead of the ex-dividend price correction ...you'll be laughing twice over.

I think it boils down to timing and data availability. If you were able to receive the data and execute the trade before everyone else, I imagine it would be possible to 'beat the herd' before they run the stock price up. However, as an individual investor, we have an extreme disadvantage in that regard. As end users, we are at the very end of the data pipeline, and it's highly unlikely that you will receive the news about a one time dividend in time to act upon it profitably. (Though this might be slightly less true for very small stocks which are much less followed.) Second, there is the issue of trade execution, because that is equally important timing wise. The smart money has execution times which would put your average discount broker to shame. I truly doubt you could beat any of them in such a race consistently.

As far as the shorting issue, if I understand what you mean correctly, I believe it would be pointless to short before the dividend is distributed, since people with shares short are required to actually pay the dividend back instead of receiving it.