Alternative Investing Strategies: Dividend Arbitrage Doesn't Work Very Often in Practice

by: Nicholas Pardini

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:
Ticker Sector Yield
CYS Mortgage REIT 20.07%
NLY Mortgage REIT 15.91%
CIM Mortgage REIT 18.25%
NYMT Mortgage REIT 13.35%
MVO Oil MLP 9.03%
FTE Telecom 10.32%
VIV Telecom 13.46%
CLCT Business Services 7.88%

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
VIV 90 cents $1.23
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.