Profiting with a Dividend Avoidance Strategy

Some funds use a dividend capture strategy, buying shares before the ex-date and selling after. In small, high-yielding stocks, this trade can move the price more than the value of the dividend, providing a profitable opportunity.

Take a look at this chart of FAV, a small CEF which itself (ironically) uses dividend capture to generate an amazing 18.6% yield (based on 52-week average price; currently, about 13%). Naturally, the ~4% distribution every quarter is a magnet for dividend capture traders.

In May and June, FAV was trading pretty much in line with its NAV. But in July, traders started buying up shares in anticipation of the 7/22 ex-date for the 46¢ distribution. It closed on 7/21 at 12.28 (a 21% premium to NAV); a few days later it fell (briefly) below 10.00 (less than 1% premium).

Again, in the "off" months of August and September, trading maintained a modest (5-15%) premium, but with the October ex-date approaching, bidding went up again, reaching a premium of over $3 on 10/16.

The "dividend avoidance" strategy would take advantage of these price swings. Having bought FAV cheaply before it was fashionable—let's say, at $9—I would have sold at 12 in July, bought it back at 10, sold again last week at 14, and will buy it back again when prices fall again—perhaps at 12 or even 11. That is much more remunerative than holding it for the .46/quarter distribution, and vastly more profitable than trying to "capture" it.

FAV is an extreme example, but there are other high-yielding stocks that move like this, too. Be alert to price movements both before and after ex-dividend dates, and you may find some lucrative trades.

Comments

[Brad Castro:]

Love the name - Dividend Avoidance. An interesting approach and one that, depending on overall market conditions, is undoubtedly superior to the fabled Dividend Capture.

Thanks for illustrating . . .

Oct 27 10:17 AM

[Lucius Quintus:]

Alan, great example, any more>?

Oct 27 10:31 AM

[User 267483:]

dividend avoidance works well with the MLP high yield stocks...ETP,EPD,BPL, OKS etc

Oct 27 11:56 AM

[mbkelly75:]

Interesting thought, thank you for the idea.

Oct 27 01:35 PM

[Joe Eqcome:]

A clever observation. Thanks

Joe Eqcome

Oct 27 09:14 PM

[Alan Young:]

thanks for all the comments.
SA removed the price chart from the article (only the discount chart is now shown); it will make more sense when you refer to the price movement.
I put in a limit order to buy FAV back near $11, and it filled on 10/30. Of course, a sustained bear trend would make this look less brilliant, but then there's always the dividend.

Nov 01 02:37 PM