Tuesday, August 11, 2009

Dancing Around Ex-Dividends

"The dividend is your friend"

With the onslaught of earnings reports, dividend based trades can add a methodology of trading that adds value to your returns.

A few things to take note when looking for 'dividend' plays that have worked for me

1/ Timing
We need to identify stocks with dividends coming up within 1 month, but not too close (i.e 1 week) - otherwise there is a good chance that the current price will reflect 'efficient price'. The theory here is that any stock 2-4 weeks away, has the potential to be mispriced as it has yet to attract the 'dividend buyers'

2/ Value
The first principle of trading an upcoming dividend, is that the dividend should offer some value, in terms of yield, as this acts as the 'value buffer'.
The quick dirty calculation being (dividend/price) * 2 = annualised yield
There have been great value in the market, even with the current upswing, there were plenty of stocks who were offering 5%+ annualised returns on their dividends.

3/ Select your Profit Target
You should aim for a return, that is greater than the dividend return, and you should aim to exit the stock before it actually goes into dividend (assuming tax considerations is a non factor for your trading). I will use, technical support resistance levels to enter and exit my trades.

4/ Fine tuning an entry point using Charts
Generally you want to find a stock that hasn't had a large price movement to the upside - this reflects that market sentiment hasn't yet been attracted to the possible value to the dividend of a stock.

Refer to entry for AAX @ 3.78 with 10c div, 24/7/2009
http://5000trades.blogspot.com/2009/07/recovery-plays-aax-lagging-for-win.html


and my entry into BXB @ 5.975 with 16c div, 4/8/2009
http://5000trades.blogspot.com/2009/08/trade-39-setup-long-bxb-and-ctp.html


and my entry into DXS @ 0.715 with 3.5c, 24/7/2009
http://5000trades.blogspot.com/2009/07/trade-33-setup-dxs-dividend-play.html


and entry into MCW @ 0.5 with 3c, 11/8/2009
http://5000trades.blogspot.com/2009/08/trade-51-mcw.html


5/ Timing of the exit can be crucial
You should choose to exit, when the price reaches a predetermined price target or % return or hold it to the ex-dividend date.
Even though a great earnings report will probably provide further upside to stocks - the potential for a earnings surprise can wipe out your profits. This earnings season's trend has seen a mixed bag of results.

Exit of AAX @ 4.2, 12 days later, 10%

Exit of BXB @ 6.5, 7 days later, 8.077%

Holding DXS @ 76c, 7.6% (18th Aug, Ex-date)

Holding MCW @ 51c, 2% (20th Aug, Ex-date)

This is by no means an empirically proven method of profits, but an indication for how a trader should think before entering into trades with defined guidelines, risk management and strategic principles.