As a dividend-focused analyst and investor, I track my portfolio results primarily by the amount of dividends I earn each quarter. I also like to discuss with my newsletter subscribers a simple strategy to get a high current yield, growing dividends, and shares purchased at a discount.
Dividend stocks with extra-high yields –above 10%– typically have price cycles that repeat between the ex-dividend dates for each quarterly payment. These cycles are something the majority of dividend-hungry investors don’t see, because if they did, the cycles wouldn’t exist. While the cycles don’t occur every quarter, you might be surprised how often they repeat. If you understand them and take advantage, you can add a nice bit of extra income into your high-yield dividend stream.
This is what the quarterly price cycle of a high-yield, big dividend stock can look like. In the last few weeks before the stock goes ex-dividend, the share price typically will increase. The investing public knows a nice dividend will soon be paid and that they must own the shares before the ex-dividend date. This desire to earn the dividend puts buying pressure on the stock and the share price goes up. On the ex-dividend date, the market functions so that the share value will open at the previous close minus the dividend amount. With a high yield stock, this can produce a significant price change.
With a high yield stock, this can produce a significant price change. For example, with a 12% yield, each dividend is worth 3% of the stock price, so on the ex-dividend date, the stock will open 3% lower than the previous closing value. Now here comes the interesting part. After the ex-dividend date, buying interest in the stock dries up, and the share price will typically decline over the next two to four weeks after the ex-dividend date. I track the quarterly share price swings of about 10 high-yield stocks and the additional declines range from an average of about 3% up to a whopping 10%. This means that through the period from before the ex-dividend date to a point a few weeks after, you will often see share values drop by up to 10% or more.
Now here comes the interesting part. After the ex-dividend date, buying interest in the stock dries up, and the share price will typically decline over the next two to four weeks after the ex-dividend date. I track the quarterly share price swings of about 10 high-yield stocks and the additional declines range from an average of about 3% up to a whopping 10%. This means that through the period from before the ex-dividend date to a point a few weeks after, you will often see share values drop by up to 10% or more.
Let’s look at the benefits of buying shares after a high-yield stock goes ex-dividend. The obvious point is that you buy shares at a significantly lower price than if you had purchased it before the stock went ex-dividend. You do not receive the current dividend, but you will earn each one going forward. With a lower purchase price too, the dollar amount of dividends you receive will be higher every quarter going forward compared to buying at the higher share price before the ex-dividend date.
New Residential Investment Corp (NYSE: NRZ) is one high-yield stock that I recommend as a long-term investment and which I also track for the quarterly dividend price swings. New Residential is a finance real estate investment trust(REIT) that primarily owns mortgage servicing rights and makes servicing advance loans to mortgage companies. The company has been a steady dividend payer and continues to grow its free cash flow. While I think the share value should be significantly higher, the market currently prices NRZ to yield around 13%. If the share value drops after the ex-dividend, that’s the time I recommend that my subscribers add to their NRZ holdings.
Here is what happened through the last ex-dividend period. A few weeks before the ex-dividend date, the NRZ share price peaked at $14.80 per share. It was still at $14.40 a few days before the ex-dividend day. NRZ’s quarterly dividend is currently $0.46 per share. On the ex-dividend date, the stock closed at $13.78, down $0.54 from the previous close. A decline that was pretty close to the dividend amount. During the following week, NRZ hit a low of 13.30, another 3.5% below the ex-dividend day closing value.
Consider this example. You were watching the NRZ share price after its ex-dividend and decided to buy $1,000 worth of NRZ shares when the price hit $13.40, about 3% below the ex-dividend close. At that time, you would have purchased 10.5% more shares than if you had bought at the before ex-dividend peak. This means your $1,000 investment will earn you 10% more in dividend payments for every dividend you earn in the future. If you are investing for the long-term and buy some more NRZ shares each time it drops after the ex-dividend date, you build a very attractive income stream over time.
Here are my rules for buying high-yield stocks. Buy shares in the few weeks after the stocks you watch go ex-dividend. Make notes of the closing prices on the ex-dividend date, and if the share value quickly (in the next two to three weeks) drops another 3% (it depends on the specific stock, but 3% to 5% is a good target) buy more shares. If you own several high yield stocks, you can check to see which drops the most and put your money to work in that stock.
A company like NRZ that won’t cut its dividend, pays a high current yield, and has the potential for dividend growth is an integral part of the income strategy for my newsletter, The Dividend Hunter. New Residential is a strong, stable dividend payer just like the 20 other high-yield stocks currently available through my Monthly Dividend Paycheck Calendar.