Dividend Strategy Session On Bank Of Montreal
Summary
- Dividend investors seeking to optimize income from their investments should look at ex-dividend dates and time their purchases accordingly. The question is, how?
- Analyzing historical performance for one of Canada's leading banks, the Bank of Montreal, I'll compare total returns around the previous 47 individual ex-dividend dates across three strategies.
- Is it best to forfeit the next dividend payment and benefit from a lower stock price in the beginning, or should you grab that next dividend payment?
- I will also show how much more or less in dividends investors can earn when buying the stock post the ex-dividend date.
Dividend investors seeking to optimize income from their investments can look at ex-dividend dates in order to time their purchases accordingly once they have made the "Buy" decision.
We all know that timing the market is extremely difficult and only very few investors consistently find the right entry points. Timing to maximize income from dividends, however, is much simpler. Buying a stock before the ex-dividend date qualifies you for the next upcoming dividend payment, whereas foregoing the next ex-dividend date should, in theory, give you a better entry price point as the stock is expected to trade with a discount on the ex-dividend date.
Bank of Montreal (NYSE:BMO) is one of Canada's most iconic dividend stocks with its dividend history dating back all the way to the year 1829. This makes it the longest-running dividend paying company in Canada right after the Bank of Nova Scotia (BNS) whose first dividend paid was paid in the year 1832. Both banks are part of Canada's illustrious Big Five banks (the others being Toronto-Dominion Bank (TD), Canadian Imperial Bank of Commerce (CM) and the Royal Bank of Canada (RY) which all boast impressive and decades-long dividend streaks.
Source: cbc.ca
The Bank of Montreal currently trades at $101 close to its all-time high of almost $107 with a P/E ratio of around 10.2 and a relatively low yield of 3.3% following a strong rally since mid-February 2021 which can also be observed among its peers albeit to a lesser degree. The Bank of Montreal has been outperforming all of its peers with the bank dramatically scaling down on the pandemic-driven and temporary build-up of provision of credit losses.
The bank's dividend has been kept steady at C$1.06 since its February 26, 2020, payment as the pandemic and the resulting uncertainty have forced the bank to take on a cautious view even though its payout ratio is comfortably in the 40% to 50% range. This dividend stalemate should end relatively soon with the yield curve expected to steepen as long rates, inflation and earnings are forecast to rise which traditionally always makes a strong case for buying value equity such as banks which only trade at 10 times earnings.
The Bank of Montreal goes ex-dividend on October 29 with payment scheduled for November 26.
I have conducted that analysis for a variety of stocks and am currently building a tool where we can look at these results collectively and across different sectors for a variety of stocks rather than individually.
Now, let's get straight into the analysis itself!
To do so, I have analyzed how a $10,000 investment in Bank of Montreal has fared so far on each of the ex-dividend dates over the last 11 years (47 observations in total) by comparing stock prices the day before the ex-dividend date, on the ex-dividend date, and the day after.
The results for these 47 ex-dividend dates are overwhelmingly one-sided. Expressed in % of most beneficial outcomes (i.e. the strategy that yielded the highest return), it looks as follows:
- Buying the stock 1 day before ex-dividend date: 8 observations; 17%
- Buying the stock on the ex-dividend date: 13 observations; 27.7%
- Buying the stock 1 day after ex-dividend date: 26 observations; 55.3%
An unprecedented 83% of outcomes favor not buying before the stock goes ex-dividend, thus implying that the Bank of Montreal stock behaves in practice virtually identically as to what we would expect per market theory.
Thus, it is not really a question of whether to buy before ex-dividend or on/after, but more of how much time is needed to catch up with performance to make up for that initial dividend payment.
Figure 1: Overview of occurrences of best outcomes by stock by year
Advancing the analysis
Next, I have calculated the actual price changes of the stock around the ex-dividend dates as follows:
- Change Day 1: (Opening price ex-dividend date) - (Closing price ex-dividend date -1)
- Change Day 2: (Opening price ex-dividend date +1) - (Closing price ex-dividend date)
- Total Change: Day 1 + Day 2
- Total Discount/Premium: Total Change - Dividend per share
This total change over the two days has been put in relation to the actual dividend payment, which serves as a proxy for by how much the stock price would have been expected to drop if it were solely to reflect that change.
By putting that total discount/premium in relation to the actual dividend per share, we get something I have termed "discount/premium in dividends" and which is depicted below for all the ex-dividend dates contained in the analysis.
Discount(-)/premium(+) in dividends: (Total Discount/Premium)/Dividend per share
A simple reading example for the latest ex-dividend date on July 30, 2021, reads as follows:
Around the July 30, 2021 ex-dividend date, investors could pocket in a total discount of C$-1.39 over the two days following the day before ex-dividend date. Expressed in dividends this amounts to 1.311 dividends gained. Or to put differently, the drop over the two days (-C$2.45) has been substantially higher than the actual dividend (C$1.06). In this case, having bought the stock on the ex-dividend date+1 would have led to a gain of more than one additional dividend per share!
Source: Author's visualization and computation
In fact, considering the last 27 ex-dividend dates, 19 times (70%) the strategy to forfeit the dividend and buying the stock on the day after the ex-dividend date allowed investors to benefit from that pattern in Bank of Montreal's stock price behavior.
To better understand this behavior, let's create a treemap, which is sized based on the "discount/premium in dividends" metric. This clearly shows when the best opportunities have occurred in the past. Similarly, it also shows when investors have lost dividends by waiting too long for the stock price to drop following the ex-dividend date.
Source: Author's visualization and computation
Again, the reading example helps understand what exactly is shown here.
Source: Author's visualization and computation
- The stock changed by -C$1.74 from the day before the ex-dividend date to the opening on the ex-dividend date. On the post-ex-dividend date, the stock dropped further by -C$0.48, which results in a total change over the two days of -C$2.22.
- As the stock dropped more than its theoretically expected ex-dividend amount, this amounts to an overall discount of -C$1.16 (paid dividend: C$1.06) and translates into 0.38 dividends gained for the investor, assuming he forfeited the dividend and bought the stock the day after the ex-dividend date.
What's more, while it is good to know what the best strategy is with Bank of Montreal around ex-dividend dates, we also need to shed light on the size of the opportunity by looking at the total discount/premium in dividends across several ex-dividend dates.
In fact, disregarding commissions and taxes, investors could have gained additional dividends in 10 out of the last 11 years by forfeiting the dividend and buying the stock post its ex-dividend date.
Source: Author's visualization and computation
In case an investor had pursued this strategy each time he could have gained an additional 15.64 dividends on an accumulated basis. Naturally, this strategy, as every other strategy, won't work each time but if history is any guide the odds are very high that it is beneficial to forfeit the dividend and instead leverage the ex-dividend discount with the Bank of Montreal.
I believe that this is a very powerful way of looking at the pricing action around ex-dividend dates for stocks.
Interestingly and maybe or maybe not surprisingly, this pattern can also be observed among one of Bank of Montreal's peers, the Bank of Nova Scotia whereas we can spot a remarkably different pattern with another peer, the Toronto-Dominion Bank.
Source: Author's visualization and computation
Aggregated, the observations stack up as following:
| Stock | Ex-Dividend -1 | Ex-Dividend Date | Ex-Dividend +1 |
| Bank of Montreal | #8 observations (17%) | #13 observations (28%) | #26 observations (55%) |
| Bank of Nova Scotia | #8 observations (17%) | #28 observations (61%) | #10 observations (22%) |
| Toronto-Dominion Bank | #19 observations (40%) | #5 observations (11%) | #23 observations (49%) |
In essence, the strategy simply does not work with TD whereas it virtually excels at with BNS and BMO. I am planning to extend this analysis to the rest of the Canadian Big Five as well as to other stocks which are generally known as typical and reliable dividend stocks, i.e. mostly telecoms, utilities and REITs. It will surely be interesting to explore if similar behavior can be observed and if/how investors can benefit from that.
To keep track of upcoming ex-dividend dates, I use the Dividend Calendar Tool (make sure to follow instructions here). This handy dividend calendar view allows me to view the respective next ex-dividend dates. Here is a sample screenshot of how this looks like (showing expected dividend payments in October for my portfolio):
Source: My Dividend Calendar
Investor takeaway
In summary, dividend investors who want quick income from their investments without having to sell anything could screen the market for ex-dividend dates and time their purchases accordingly. However, in the case of BMO, it makes more sense to forego the ex-dividend date and instead buy the stock on or after the ex-dividend date. Historically, this has produced superior returns.
Although, as so often, results are subject to one's own individual interpretation. It definitely shows that, for the Bank of Montreal, solely relying on the stock price to decrease following the ex-dividend date would have been the best decision in the cases covered in this article.
Naturally, the "buy" or "not buy" decision should depend on far more factors than just the ex-dividend date, but it is one variable to consider when trying to optimize your income.
What do you think about the Bank of Montreal? Are you timing purchases in line with ex-dividend dates or not care at all about this?
This article was written by
Analyst’s Disclosure: I/we have a beneficial long position in the shares of BNS, TD; RY, CM either through stock ownership, options, or other derivatives. 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.
I am not offering financial advice but only my personal opinion. Investors may take further aspects and their own due diligence into consideration before making a decision.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
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Comments (6)
Bets are on that those "hindrances" will drop soon. So bets are that the banks will have a hefty div increase as they have not increased for close to two years now. Which technically puts them off the aristocrat listings except that they had no other option..RICARDO
