Conservative by nature, my investment portfolio consists primarily of high-yield fixed-income preferreds, which I rarely trade, and in most instances, keep until they are called away by the issuing company. However, during my time as a market investor, I experimented with a number of what I term "trading tactics" I developed to enhance my portfolio yield.
Before I begin, it's necessary to present the theory behind this and other trading tactics I will discuss in this and succeeding articles. The x-date is the all important date, which this and the other trading tactics are based upon. On the x-date, and after, the seller retains the right to receive the preceding month's declared dividends, which for our purposes is the quarterly, or past three months' dividend owed. The monthly dividend is too small, and therefore, insufficient to move a stock's price in any significant manner. Up until, and including, the day prior to the x-date, the buyer earns the right to collect the above-mentioned dividend.
Consequently, more often than not, a stock's price will rise from the declaration date (the date that the company states what amount the upcoming dividend will be paid, its x-date, its record date, and the date it will be paid) until that day before the x-date. This is so because there are companies and individuals whose goal it is to capture that dividend, thereby earning three months of interest for what they consider is a short-term investment. Many intend to sell, shortly thereafter, at or near their price and purchase, hopefully profiting by the amount of the dividend captured.
However, on the x-date, the price of those shares usually falls by the amount of the dividend paid, and I have found usually more, sometimes up to two times that dividend amount. I also discovered, that within the first two hours of trading, the price of those shares will fall equal to the amount of the paid dividend, and on occasion up to twice that amount. This happens to be the basis of another trading tactic I will discuss in a later article. Bottom line: Today's tactic, the D-play, the goal is to buy shares as close or just prior to the declaration date with the intention of selling them at a profit prior to the x-date.
The D-play or Dividend play is my favorite strategy, simply because it's the safest, easiest to understand, and can work up to 90% of the time in a neutral or upwardly trending market. (Consequently, I recommend against utilizing this strategy during periods of volatility or during a bear market.) Furthermore, by paying careful attention to global macroeconomics, domestic politics, and news, headlines, and press releases concerning the company whose stock you are about to employ in this strategy, you can effectively increase your win-loss ratio by additional percentage points.
I am secure with my prediction of success because I have utilized this strategy on numerous occasions, always with positive results, winning between 70 - 90% of my trades, depending upon the time I elected to make my purchase, which I shall explain and discuss below. Suffice to say, the greater the risk, the greater the reward; consequently, although the winning (buy low, sell high) percentage dropped, the monetary gain per trade increased.
After researching and charting numerous high quarterly dividend paying securities ( .35 or more), I determined that in most instances, more than 70% of the time, the market price of securities increased as they approached their all-important x-date. This does not mean that prices appreciated in a straight line. As is normal, their prices rose and fell, yet in most instances trended higher. Consequently, I would buy shares as close to their dividend declaration announcement as I could get. The reason for this urgency is that once the announcement is made, and that announcement signifies that the dividend will be maintained or increased, the stock price usually jumps nicely. Armed with this knowledge, I was determined to be right at the front of the line to receive this knowledge as quickly as possible after its announcement.
To my chagrin, in spite of diligent headline hunting and requesting e-mail notification of each company's press releases, I was, more often than not beaten to the punch, as indicated by price jumps, even before I received news of the dividend declaration announcement. It was at this time I had a critical decision to make. I could wait for the dividend declaration announcement before placing a bid or I could choose the more risky approach of anticipating the announcement date and by buying the stock prior to that date, thereby more fully take advantage of the announcement day jump in price. Obviously, the downside of this approach was that the dividend declaration might declare a dividend cut, or worse, a dividend suspension. This is just one of several reasons for not employing this strategy during a down market when dividend cuts are more likely to occur.
To accomplish my goal, I began making a list of those high dividend yielding and paying stocks I had previously traded and were familiar with. I added to this list with a visit to the Dividend Detective - Big Dividend Stock List web site, which lists the current top 800 dividend yielding securities.
My completed list now contained approximately 50 companies, which I would trade utilizing this strategy. This allowed me approximately 200 yearly trading opportunities, or 4 quarterly x-dates for each of the 50 companies selected. Then, with my list complete, I opened one of my all-time favorite web sites, DividendInvestor.com.
I love this site and use it often to research dividend yields, declaration dates, x-dates, payment dates, and historical performance of the securities I am interested in trading.
Let's review the information the opening page provides. On the left side of the screen, type in the symbol of the company you want to research (we'll use TGP for Teekay LNG Partners for this example) and hit enter. Now scroll down the page. You'll learn a bit about the company, its dividend yield according to previous day's closing price, which you'll find a bit further on down the page, and other information you might find useful. One caution, it's always best to do your own math and verify all information before acting upon it. This is true for any investment site you visit. To continue, for our purposes we are most interested in the dividend declaration date, the x-date, and the historical record of the dividends paid.
Obviously, we like to see this amount rising or at least staying the same; however, for this strategy it's the next click of the mouse, on the "Dividends Paid Since" button that will bring us to the information we are most interested in. It provides the historical record, over the past 5 years (more if you chose to pay) of declaration dates, x-dates, and payment amounts. Now you are ready to add some information to that list of stocks you've compiled. I prefer to utilize an excel spreadsheet, which I employ regularly for all my market calculations, and most significantly to track my investment history, including dividends received, portfolio trading history, and an accurate account of the exact dollars invested and earned since I began investing, once again, in August 2008.
Utilizing TGP for this example, Dividend Investor informed me that for the past 5 years, TGP declaration dates were declared between 1/2 and 1/26. I used the earliest and latest dates, which provided the range that I could expect TGP to declare. This range is normally not as wide as demonstrated.
An example of a D-play spreadsheet I employed:
Back to Dividend Investors historical view: For the purpose of this strategy, what we are initially interested in is determining the approximate date the upcoming dividend declaration announcement. Therefore, I scan the date range (O) column and concentrate on the present quarter's upcoming declaration dates. I am writing this, for example, in November, 2015, consequently, I am immediately interested in past January declaration dates for the companies starting with TGP and below. The companies above, lines 2 through 14, have already declared. For our purposes let's concentrate on those companies I actually placed a bid on. MPW, ARCC, and OFS.
These companies had already declared and there would be no surprises when I placed my bid. Seeking a higher return, and willing to take more risk is when I place a bid a few days before the anticipated declaration, which I utilize column for.
Trading the Strategy
Further populating my spreadsheet, I begin plugging in dates and amounts, which will determine which stocks I will bid on, and for what amount will I open my bid.
In columns M and N, I added the previous two week high and low market prices for each of the stocks listed. I obtained this information from another of my favorite sites for stock information, Yahoo Finance.
Click on to the page and enter the symbol of the company you want to research (Medical Properties Trust, so MPW for our purpose) and hit the "Historical Prices" button in the column on the left. From this list, we are interested in the past 2-week high and low price of the stock, which we will add to our spreadsheet. As of this writing, MPW's 2-week high and low were 11.61 and 10.69. You might also note that its prices were trending higher.
Consequently, knowing the trading range over the past two weeks, I would have placed my opening bid toward the low range of the two week span, at $10.69; however, because of this stock's upward trend, I decided to add a few cents to the bid to give me a better chance of getting it, therefore, 10.75. Evidently, I didn't get it, as you can see on the spreadsheet that column E was not populated.
Of the companies listed, I only bid on two others, Ares Capital (NASDAQ:ARCC) and OFS Capital (NASDAQ:OFS). My initial bid on ARCC was for $15.35, which was accepted, as indicated in the cost column, and in column (NYSE:K), the 1,000 shares I purchased. Immediately I placed a sell order for $16.35. If accepted (and it was) I walked away with a profit of $1,000, less the $10 transaction fee -$5 in, $5 out.
With OFS, I got it at my initial bid, but only 800 shares. I tried to sell them for a $1.00 more, but the best I could do before the x-date rolled around was $10.40, another tidy profit of 800 x $0.60 = $480.
Concerning the companies TGP and below, I populated all the expected declaration date ranges and will place bids accordingly at the beginning of the range on companies that I deem worthy of a bid. At the time I recall the market was headed south, the absolutely wrong time for the D-play tactic. As you can see, no further action was taken.
However, had I continued, I would have further populated the list with additional information as it was presented. I already logged in all the last paid quarterly dividend amounts, for quick reference, in column (NYSE:L).
Notice how my spreadsheet is organized: not alphabetically by stock symbols, but chronologically by their expected dividend declaration date, with the soonest at the top. Then I watch and wait.
With each purchase, I am able to figure my yield percentage, useful in my decision whether or not to keep the stock in the event I decided that keeping it and collecting the dividend is a more attractive alternative to selling it prior to the x-date. Remember, I am basically a long-term investor always seeking to enhance my portfolio. The above strategies are simply a way for me enhance my yearly earnings and further enjoy the game.
To figure the yield of :
$0.38 (quarterly dividend) X 4 = 1.52/15.35 (NASDAQ:COST) = 9.90% yield
An attractive yield worth considering.
Before I get ahead of myself, let's explore the thinking before I sold my position in ARCC:
The x-date, I learned at the time of the declaration, was set for 12/11/15. Through exhaustive research, I have concluded that the day before the x-date is really not the optimal time to attempt the sale. In fact, more often than not, it's two days before the x-date that has proven to be the best time to attempt the sale. I found this to be the case for two reasons: First in many instances, higher prices are reached 2 days before the x-date. Secondly, if that day happens to fall on a market down day, I still have the opportunity to sell the shares on the following day under potentially more favorable market conditions. This was a nice, comfortable stock to play. From the 11/4 date of declaration, I had until 12/9 to make the sale. I accomplished it within that time frame and won.
Trading for maximum profit within the D-play strategy:
Knowing I had until 12/9 to sell, and after a few days the price was approaching my ask. I could take the $1.00 profit, or anticipating it could climb higher, I could have adjusted my ask higher, hoping for even a greater payday. Alternatively, I could have made the quick sale, and quickly placed a bid for those same 1000 shares at my original bid of $15.35, knowing few stocks rise in a straight line, more normally they zig and zag up and down. During my hungry heydays in 2011, when I actively played this tactic, I had occasion to buy and sell the same position up to 5 times prior to the X-date. The more you play, the better you get the feel for trading this strategy.
Expanding on the Above
In this instance, for several reasons, I choose to sell and take the profit. The first is because I believe a bird in the hand is worth two in the bush. I've locked in my profits on a quick jump that was at least partly due to the favorable market, which might not be so favorable tomorrow or the following days. Additionally, the company might issue a press release announcing the sale of several million additional common shares, which almost always drives down its price at least for a few days or more. Finally, because I still have plenty of time to trade this security, I sell my position and immediately place a bid in the neighborhood of my low-ball initial bid, hoping to repeat the process. Because the market and individual stocks never move in a straight line, and often move up and down along a parabolic curve, it makes it possible to buy low and sell high over a very few days. I have, on several occasions, been able to accomplish several trades of the same stock between its declaration date and x-dates at a very handsome profit. In fact, while watching the stock's movement, you'd be surprised how well you can gauge the bottom and top of the parabolic curve, which are more evident on charts.
No, I haven't forgotten the downside when stuff happens. In those instances when market conditions, or bad company or sector news affects share price negatively, I always take a more detailed look at the company before making my final decision. Because I am a long-term dividend investor and because I purchased this company's stock at an attractive dividend yield, 9.90%, I might have been inclined to add it to my portfolio. And don't forget the added benefit collecting $380.00 in dividends. However, if after careful review, I decided against keeping those 1000 shares, I'd attempt to sell them at what I believe is the most risk adverse opportune moment and suffer the loss, which with my trading record using this strategy was usually less than 15% of the time.
Because this is a complicated though very effective tactic, I'm certain there will be a host of questions, which I will be more than happy to answer in the comment section. I urge that, if interested in trading this tactic, you read this article as you would a math text and work the spread sheet and the information it contains as you might a math problem. I also suggest that you visit the sites for which I provided the links to familiarize yourself with the wealth of information they provide. Lastly, for caution's sake, you might want to make you first trades hypothetically, at least until you are more certain of the tactic and how to most effectively trade it. My guarantee holds: Do your homework, do your proper due diligence, and prosper.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.