Debunking the myth of going ex-dividend

Frankly I don't see why the issue is so complex - if a company has good growth, FCF and market share, eventually the share price will continue to rise even with or without ex-dividends!

Business Times - 01 Aug 2011

Hock Lock Siew
Debunking the myth of going ex-dividend

By MICHELLE TAN

THE earnings season is well underway and some investors may be smiling ahead of the upcoming National Day holiday as companies start to declare dividends.

Already, some dividend announcements have been made by certain real estate investment trusts (Reits) and it could be an opportune time for investors to come in and take a bite off the season's 'monetary offerings'.

However, investors do have to take note of the stock's ex-dividend date, as going in on, or after, that date would leave one no richer than when starting off, as that date marks the final cut-off to buy the stock in order to be entitled to the season's payout.

But remembering the date is probably the easy part with the advent of mobile calendars that offer timely reminders to even the most forgetful.

The bigger dilemma that continues to cloud the minds of investors time and again is none other than the decision of whether to buy a stock just before it goes ex-dividend, especially after finding out the period's dividend is surprisingly 'enticing'.

So why is this seemingly simple decision so mind-boggling for many?

Common sense tells investors that buying a stock just before it goes ex-dividend would be a preposterous idea as the dividend declared for the period would already be priced into the counter's open-market trading value once it is declared.

But does common sense always depict what happens in reality? Perhaps not.

In an attempt to shed some light on the notion that dividends are typically priced into a stock's price before it goes ex-dividend, we took a basket of Reits that commit to quarterly payouts and plotted their net positions on each constituent's respective ex-dividend dates across each quarter since 2006.

Taking the closing price of the stock on the ex-dividend date, minus the price on the day prior, before adding back the declared dividend for the period, it was found that the majority of the basket tended to yield positive net positions on their ex-dividend dates for the past five years, debunking the myth behind the 'fateful' day.

In fact, at least half of the Reit basket closed in a positive net position for approximately 76 per cent of all the quarters since 2006.

As such, it might not always hold true that one would be at the losing end if he invests in dividend counters after the period's 'token' has been declared.

Having said that, the conclusion was arrived at assuming all the companies in the basket did not announce any material event that could trigger an upsurge or dip in share price.

But nonetheless, the findings should warrant some thought.

Instead of planting funds into a dividend stock waiting for the respective payouts each season, one could invest his money elsewhere and still take a position in the counter at the eleventh hour and stand a chance to grab a piece of the cake along with other loyal shareholders that have been clinging on to the counter over the long term, thus losing out in terms of opportunity cost.

As such, it seems that one could potentially have his cake and eat it too after all.

Quote:Instead of planting funds into a dividend stock waiting for the respective payouts each season, one could invest his money elsewhere and still take a position in the counter at the eleventh hour and stand a chance to grab a piece of the cake along with other loyal shareholders that have been clinging on to the counter over the long term, thus losing out in terms of opportunity cost.

Did he consider the transaction costs of switching from one stock to another? I usually agree with Hock Lock Siew comments on investing, but definitely not this one. If one is serious in investing in dividends stock, the important question to ask is if the stock can continue to pay consistent dividends in the future as has happened in the past? And also assess if the current price offers a dividend yield that is attractive enough? Why bother so much about the timing?

(02-08-2011, 09:13 AM)Ben Wrote:

Quote:Instead of planting funds into a dividend stock waiting for the respective payouts each season, one could invest his money elsewhere and still take a position in the counter at the eleventh hour and stand a chance to grab a piece of the cake along with other loyal shareholders that have been clinging on to the counter over the long term, thus losing out in terms of opportunity cost.

Did he consider the transaction costs of switching from one stock to another? I usually agree with Hock Lock Siew comments on investing, but definitely not this one. If one is serious in investing in dividends stock, the important question to ask is if the stock can continue to pay consistent dividends in the future as has happened in the past? And also assess if the current price offers a dividend yield that is attractive enough? Why bother so much about the timing?

Yes, taking the price you paid and the current yield will tell you more or less to hold for dividend or to sell for capital gain
Short-term timing is very difficult.
You have to be right twice.
Well i still practise Bear/Bull cycle timing.
It can be anything from 2 to 5 to 8 or even 10 years.
So far so good.
Thanks a lot to whatever one's belief.
Shalom to all investors.

I read from many forumers in other forums that they can do this; and I always take this with a pinch of salt.

Honestly if anyone can really make turn this into a workable strategy on a consistent basis, then I really have to salute him (or her).

Like any naive, wet-behind-the-ears investors in my earlier years, I tried this for myself but can never get it to work on a consistent basis. While I have not did an in-depth analysis on those times where the strategy did not work, my feel is that the over-arching macro issues seems to be more important than the fact that the stocks gone ex-dividends.

It would probably work with stocks like DBS and Capland in the boom years before the lehman collapse. But trading with SWs at that time was infinitely more rewarding than trading the mothers.

Try doing that for stocks like SIA (ex-d today dropped >$1.50) and you will be slaughtered!

I considered myself lucky that overall, I was positive though I still 'battle scars' in my current portfolios to stay clear of such trading strategies.

Another example, SATS ex-d today dropped 17 cents as of now, dividend to be received is 12 cents.
Agreed that this is a difficult strategy to be consistently profitable.

A better strategy is to buy in stocks before they announced substantial dividends..

To do it, there are few more guidelines for the selection of such stocks.

They are
1. consistent payout policy (best if co has a stated dividend policy)
2. FCF
3. expected dividend yield must be more than 5%
4. Stable outlook

I think each counter has their own merits, and outcome may vary. If there is market sentiment changes on days ahead of Ex-Divident and on the day itself, deviation in price may occur which may or not be priced in.

I also notice quite a number of times there are some patterns before and after XD in before/subsequent weeks or month for certain stocks. So it maybe interesting to investigate them before you go into stock that has declared CD.

(02-08-2011, 12:59 PM)wsreader Wrote: Another example, SATS ex-d today dropped 17 cents as of now, dividend to be received is 12 cents.
Agreed that this is a difficult strategy to be consistently profitable.

It is another 4 cents slide today, making a total of 21 cents dropped since XD as compared to 12 cents dividends. The drop can be attributed to the the US woes, but that is the point, one can never time the market accurately, and not advisable to do that.

If I focus on these paragraphs,

Quote:Taking the closing price of the stock on the ex-dividend date, minus the price on the day prior, before adding back the declared dividend for the period, it was found that the majority of the basket tended to yield positive net positions on their ex-dividend dates for the past five years, debunking the myth behind the 'fateful' day.

In fact, at least half of the Reit basket closed in a positive net position for approximately 76 per cent of all the quarters since 2006.

I draw a few conclusions,

1) Only slightly more than half closed in a net positive position. That means the rest of the time, it must be negative or at best even.

2) Only 76% of the time means overall, the probability is 0.5 * 0.76 = 0.38+ (I use + to account for the term 'at least 50% of the time it's positive')

3) The study uses REITs, which means DPU is either slow growth or may even drop (due to new shares issues) ie. likely not applicable for Growth Stocks where dividend payout will likely grow over time (assuming they pay dividends).

As the probability of getting a positive outcome is only 0.38+, I don't think the odds are good enough for me if I were to make such a bet to buy just before xd. Cos' for the majority of the outcome, I'll end up with a negative outcome or at best even.

All these talks of strategies are about market timing. If you know what's going to be announced tomorrow, be it earnings/dividends, exceed/below expectations, unless you know for sure it is going to happen, then it is actually insider trading- a crime.