Dividend incomes can be a significant boost to an investor's annual returns. However, why does income investing have to equal buy and hold? With higher yield securities such as mortgage REITs, energy MLPs, telecom companies, why not just claim the income without the holding risk?
In this article I examine the strategy of dividend arbitrage. The ex-dividend date is announced quarterly upon the declaration of the dividend. Since investors are not entitled to the quarterly dividend payout if they buy on the ex-dividend date or after, buy the stock a few days before the ex-date as your entry point. The record date that the company acknowledges that you are a shareholder is usually two days after the ex-date, so to be safe, traders should sell the day after the ex-date to lock in their dividend check. Due to daily fluctuations of the market, I will only examine the possibility of dividend arbitrage with stock with higher than a 7.5% yield.
The risk of this strategy is that the targeted stock has a substantial rally between quarterly payouts and therefore lowering your yields. Since we are currently not in a bullish market and a slow growth recessionary economy, this risk is not as prevalent now. Also the stock may fall substantially between the purchase and the day after the ex-date.
|Examples of Stocks that are Candidates for Dividend Arbitrage:|
However, does dividend arbitrage work? Most of the time it unfortunately does not. In the case of mortgage REITs sell of the most on the ex-date eliminating any chance of dividend arbitrage. However, the data for the other tested stocks is inconclusive. Here is a chart below that shows the results of a dividend arbitrage strategy using the average dividend and ex-date price change during the past four quarters.
|Stock:||Avg. Quarterly Dividend||Average Loss on Ex-Date|
|CYS||60 cents||59 cents|
|NLY||65 cents||70 cents|
|CIM||16 cents||15 cents|
|NYMT||19 cents||14 cents|
|MVO||68 cents||37 cent gain|
|FTE||96 cents||16 cents|
|CLCT||32 cents||17 cent gain|
Overall, dividend arbitrage is a nice theory, but it does not work very often in practice. It is the best bet for investors to time your trading on something other than payout dates.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.