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We had some good conversation on one of my other articles on the topic of how to play the mREIT dividend dates, and I do have a little extra capital in my brokerage account and might be tempted to do so with the mREIT Dynex Capital (NYSE:DX) which is one of the mortgage REITs we have been following.

For background on this topic, I would refer you to this article, which says that trying to trade around the dividend on one of these high-yield REITs is generally a bad idea. However, with a little cash in my account, and the Ex-Dividend date coming up on 4-3, I am still tempted to do it anyway.

Here is the dividend history of this fund:


(Click to enlarge)

Here is a stock chart on which is put the dividend dates:


(Click to enlarge)

You can see that in general, the stock price does exactly what it should do in theory, which is go down right after the payment of the dividend. So, if I go long on Monday morning, in advance of the ex-dividend date, I will collect the dividend but might be worse off.

So the question of the day is: Will the drop in the stock price offset the benefit I get from the dividend? I will assume for this set of calculations that I am in a sufficiently low tax bracket that it does not really make any difference from a tax standpoint which of these things I do, and also, that my transaction costs (brokerage fees) are low enough as a percentage of the investment that it also does not make any difference.

Here is a table that gives this in some detail:

2012 EX-Div Date Div/Share Price Before Price After Div % Price Chg %
Q2 4/3/2012 0.28 9.52 ? 2.9% ?
2011
Q4 12/28/2011 0.28 9.48 9.13 3.0% -3.7%
Q3 9/28/2011 0.27 8.43 7.51 3.2% -10.9%
Q2 6/28/2011 0.27 9.98 9.62 2.7% -3.6%
Q1 3/29/2011 0.27 10.4 9.82 2.6% -5.6%
Averages 2.9% -5.9%

We're trying to figure out the future based on past performance, which is the very thing that all the disclaimers tell you not to do, but over the past 4 dividends, the average dividend payout was around 2.9%, and the average price fall was about twice as much, which shows that in general, your account would have been worse off a few days after the transaction if you had tried to claim the dividend.

Note that the "after" price above is sometimes a few days after the Ex-Dividend date, when the stock price tends to hit a minimum. This may of course be influenced by overall market conditions. Also note that I'd have been really unlucky in September, when the market was rough, losing 10% in the few days after the 3.2% dividend payment.

There is another strategy: Sit on the money, wait for the Ex-Dividend to pass, and then go long after the price drops:

2011 Dividend Price After Price +90 Div % 90 Day Chg
Q4 12/28/2011 0.28 9.13 9.52 3.0% 4.3%
Q3 9/28/2011 0.27 7.51 9.48 3.2% 26.2%
Q2 6/28/2011 0.27 9.62 8.43 2.7% -12.4%
Q1 3/29/2011 0.27 9.82 9.98 2.6% 1.6%
Average 4.9%

In this case I am assuming that I will hold the stock until right before the next dividend is paid, 90 days later.

As you can see, in this case, over the last year, I'd have been better off to enter after the dividend is paid 3 out of the 4 times, and on average, been better off by going long right after the price goes down, even if I sell the stock just before the ex-dividend date. There may be some intermediate holding period that would have gotten me a little better return.

I should also look at the "Buy and Hold" strategy: If I'd gone long just before the first quarter dividend last year at 10.40, and collected the dividends, I'd have a total of $10.61 right now in my account, which is a bit more than 2% rate of return, not especially great.

So, based on all this, I'd have to say the following:

1. The data is quite clear that going long on DX or one of these other REITs just before the dividend is a bad idea.

2. The strategy of going long right after the dividend is looking a little better, but is not completely foolproof. It all depends on the holding period, and the longer the holding period, the more subject the investor is to things that are going on in the broader marketplace that might affect the outcome.

3. The strategy of going long on DX in and of itself and sitting on it for awhile could have been better over the last year, and that might be worthy of further consideration going forward.

I did exit Chimera (NYSE:CIM) the other day, right before the Ex-Dividend date which is March 28th. I will check back in a day or so and see if that exit strategy was successful.

The world is chaotic, and there are no guarantees on anything, especially trying to capture the dividend on one of these high yielding Mortgage REITs.

Source: Playing The Dynex Dividend