Dividend capture strategies have been espoused by investors for a number of years now as a way of collecting dividends without tying up your money for too long. The problem is that in the long run most never completely work out as you’re more likely to see losses around the time when you should expect gains. A new “anti-dividend capture” strategy uses the losses from other investors’ failed dividend capture strategies to your benefit. Today we’ll go over four stocks to add to your portfolio right now to take advantage of this for some quick gains.
There exists a large group of stock owning investors that prefer dividend paying, high-yield stocks. A subgroup of that group are traders and investors with buy and sell strategies that attempt to “dividend capture” big dividends versus earning dividends through a buy-and-hold strategy. The idea behind dividend capture is to buy shares and hold them just long enough to collect the dividend and break even on the share price.
If this strategy would work as planned, an investor would expect to collect 6 or 8 big dividends every year from a small group of high-yield stocks, increasing the yield on invested capital by 50% or even 100%. Unfortunately, the rules of supply and demand plus the effects of large group psychology make it nearly impossible to successfully employ a dividend capture strategy and turn 8% dividend yields into 12% or 15% annual returns.
Yet there are many, many traders who keep trying to make the strategy work, and high-yield focused investors who understand the phenomenon can profit from an “anti-dividend capture” investing or trading strategy.
The dividend capture crowd actually causes the share prices of popular high-yield stocks to move in a counter cycle to what would allow them to profit from the strategy. Heavy buying leading up to the ex-dividend date often causes the share price to rise as the cutoff to earn the dividend approaches. Then on the ex-dividend date, the share price will drop by the amount of the pending dividend payment.
Then, over the next two to four weeks, dividend capture traders must get out of the shares so they can put the money to work by buying shares of the next stock on their list that will pay a dividend. The result is that the share price often drops by several percent more in the month after a stock goes ex-dividend thus eroding the gains the traders thought they could count on.
There are a couple of ways for you to play these natural price swings in high-yield stocks. One way to boost your brokerage account value is to wait until two to three weeks after a stock goes ex-dividend before buying into the stock or adding to your holdings. The majority of the time you can buy shares that have dropped by the dividend amount on the ex-dividend date plus couple of percentage points even lower. If the stock carries an 8% yield, this means you can save 4% to 5% on your share purchase price.
Another way to play these dividend driven price cycles is to set up a method to track stock prices from quarter to quarter and buy when the stock drops after going ex-dividend and sell the shares when the price rises before the next dividend payment.
In many quarterly periods, this strategy can produce a return that is two to three times the dividend amount. It is one of the strategies employed to find the high-return, low-risk recommendations for subscribers of my 30 Day Dividends newsletter.
If you are looking to put some money to work over the next month, here are four high-yield stocks that will go ex-dividend in the next week and have historical patterns of post ex-dividend price drops.
America First Multifamily Investors LP (Nasdaq: ATAX) owns tax-exempt mortgage revenue bonds, and pays an 8% tax free yield to investors. This is a buy-and-hold type of investment were you can pick up shares one to two percent lower in the weeks after the shares go ex-dividend on 9/26.
Ellington Residential Mortgage REIT (NYSE: EARN): this finance REIT with its 12% yield definitely follows the fall after the ex-dividend pattern. With a $0.55 dividend, the share price has swung by $1.00 to $2.30 over the last three quarterly dividend cycles. EARN also goes ex-dividend on 9/26.
Starwood Property Trust, Inc. (NYSE: STWD) is a commercial mortgage finance REIT that usually presents a very nice price entry within a few weeks after going ex-dividend. STWD yields 8.4% and is another high-yield stock going ex-dividend on 9/26.
Ares Capital Corporation (Nasdaq: ARCC) is a business development company (BDC) with a very tradable dividend swing chart pattern. ARCC is one of the biggest and most well-known BDCs and thus often sees appreciable price swings due to the buying and selling activities of the dividend capture traders. ARCC yields 9.35% and goes ex-dividend on 9/29.
Creating a reliable source of income from dividends doesn’t have to be hard or complex, but it does take time and dedication. Or you can check out my new Monthly Dividend Paycheck Calendar that’s set up to make sure you’re getting 2, 3, even 5 dividend paychecks per month. It tells you when you need to own the stock, when to expect your next payout, and how much you could make. I’ve done all the research and hard work for you, you just have to pick the stocks and the dividend amount you want to collect each month. Find out more about this unique, easy way of collecting monthly dividends, CLICK HERE.
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