Dividend stocks can be an essential part of a prosperous portfolio. Not only is it possible to profit from their regular payouts and stock appreciation, but also through trading shares with the right strategy.
If you’re looking to do the latter, the ex-dividend date is central to when and how you buy and sell. This day is the cutoff point by which you must own shares of a stock to be eligible for the dividend payment.
It’s a key component in trading this type of asset successfully, and it can influence your plan of action. On this page, we are going to dive into ex-dividend dates and the strategies for buying and selling around them so you can trade with confidence.
Understanding Ex-Dividend Dates and Their Impact on Stock Prices
When a company announces a dividend, it sets a record date, which is the day they document all shareholders. On the other hand, the ex-dividend is set by the SEC and falls on the day before the record date. It is the point at which you must own stock to receive the payment. Naturally, when a company makes this announcement, interest piques. As the ex-dividend date gets closer, more and more investors purchase shares resulting in a rising stock price. Typically, the increase matches the dividend payment, but it depends on market activity.
The amount of a dividend payout can affect the price of the stock as well. If it’s higher than expected, there may be even more of a rush to buy shares, resulting in a larger spike in the value. Conversely, the opposite may happen if it’s lower, and the price might drop.
Once the ex-dividend date comes around, it’s normal to see prices fall by the amount of the dividend. Since anyone who buys a share on this day is no longer eligible for the payment, interest often wanes. As you can see, the relationship between ex-dividend dates and stock prices may determine your method of approach when it comes to trading.
Trading Strategies for Ex-Dividend Dates
There are a few things to know about trading around ex-dividend dates. You should be aware that if you plan on selling on the ex-dividend date or after, you are still eligible to receive the dividend payment. However, you won’t make the cut if you sell your shares before that day. These factors and more can determine how lucrative your trade is. Let’s take a look at a few strategies investors follow to find success.
Dividend Capture Strategy
One method for earning a profit off of dividends is the dividend capture strategy. That’s when you buy a stock before the dividend drops, hold onto it until you get paid, and then sell it. The aim is to sell it for the same price you bought it for and “capture” the profit from the dividend.
It can be a rewarding strategy if you play your cards right. With the ability to stack multiple dividends and quickly reinvest, there is the potential for sizable earnings. However, small-time traders might find that this method just isn’t worth their while. When you factor in brokerage fees and taxes, what you thought was a profit could turn into a loss.
Pairing with Options
Dividends also attract options traders for a variety of reasons. The volatility and relatively forecasted price changes can make some strategies valuable.
One options strategy involves buying shares in anticipation of this ex-dividend price fluctuation and writing in deep in the money covered calls that span the date. That lets you collect a premium and sell the call contract back for a profit when the price drops.
Another strategy that revolves around options is called dividend arbitrage. In this case, also leading up to the ex-dividend date, you buy the stock and an equal amount of put options contracts that are in the money. When the day comes, you’ll get paid on the dividends and can then exercise the option to reclaim any lost ground.
Risks and Challenges of Trading Around Ex-Dividend Dates
First, although it seems obvious, you must pay close attention to the dates and meet the deadlines. If you’re the kind of person that tends to be forgetful or scattered, this might not be the type of trading for you. Staying organized and vigilant is critical when juggling multiple dividend stocks.
Second, it’s always possible you won’t be able to sell your shares for what you bought them for, and you end up losing money. The value of the stock is at the mercy of the market, so there are no guarantees you’ll come out on top. Lastly, always consider any brokerage fees and taxes, as they can quickly eat away at your earnings. You might find that the trade wasn’t worth the effort once you account for those costs.
While you can’t control the market, you can give yourself an advantage. Investment portfolio trackers will help you put all your assets in one place, closely examine your fees and follow your stocks so you can stay ahead of the game.
Portfolio management software will set you on the right path, but doing your research is also essential. Take your time and read up on every investment you make. It can be tempting to rush into trading dividend stocks, especially when looming deadlines are attached, but it’s ok to skip this dividend and wait for the next. Educating yourself will help you more in the long run than taking a last-minute risk.
Trade Around Ex-Dividend Dates Like a Pro
Ex-dividend dates are an integral part of buying and selling dividend stocks. Not only do they determine who is eligible to receive a payment, but they also might influence your strategy for making a profit.
Whether your plan of action involves simply capturing dividends or incorporating more complicated methods with call and put options, doing plenty of research is the key to success. With a little knowledge, practice, and a good investment tool, you’ll be on your way to trading around ex-dividend dates like a pro.