Friday, August 2, 2013

Is this new investing strategy worth the effort?

I'm just thinking aloud of the recent patterns I've noticed in the pre and post Ex-dividend strategy for the past couple of months. I've personally known of people who trade shares just before a company announces its results. While the results may go either way, a certain level of predictability is required to mobilize its randomness.
 
 
 
What I think is more predictable is not trading shares before a company announces its results but rather trading shares before a company goes ex-dividend. As we might already know in a perfect market theory, the share price of a company will usually drop in price by the amount of the dividends paid on the day it goes ex-dividend. For instance, SPH closing price on the 31st Jul 2013 (a day before the company goes ex-dividend) was S$4.40. When it goes ex-dividend the next day paying out investors the special 18 cents dividends in the process, the share price should theoretically fall to S$4.22 (S$4.40 - S$0.18). But SPH price fell to close at S$4.17 on the day it goes ex-dividend. That is a difference of the extra 5 cents per share.
 
SPH is of course not the only case which reacts that way. Other stocks in my portfolio such as Ascott, FCT and FCOT and almost many many others all had the same "fall more than dividends paid" syndrome which makes me thinking aloud whether its worth the effort to sell on the last day before it goes ex-dividend and buying it again on the very next day when the stock has gone ex-dividend. Note that this practice will need to be consistent on whether the stock price has ended up lower or higher the very day it has gone ex-dividend. So regardless of the situation, you will still go ahead to buy the shares. The only consideration is whether you are taking the dividend early (capital gain) or dividend later . In a country like Singapore where capital gain is not taxable (unlike US), this strategy might make sense after all.
 
Another advantage I can think of is the idea of time value of money. Dividends are usually paid to investors a few weeks later after it goes ex-dividend. By using the above strategy, you will reap the "dividends" earlier by that few weeks.
 
The only disadvantage is probably the commission you will need to pay to your broker by trading in and out. But if you are trading in large lots or via SCB, then this will almost be a negligible cost factor to consider.
 
I'm just thinking aloud to see if anyone has done this strategy before and it is more beneficial to do it this way. If you do, please share aloud.

3 comments:

  1. Hi B,

    Like you said, I do monitor STE have the same behaviour evey Ex-dividend for many years back, and tried your method at begining of the year, it moves higheir than lower.

    Best Rgds ...... Kent

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    Replies
    1. Hi Kent

      I do have STE for some years until I divested it a couple of weeks ago. On the overall, I think its price did not go up much on the day right after xd. I think you are referring to the few days after it goes xd. If thats the case then that could be true. Ste is a very defensive stocks with high earnings visibility.

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    2. Oh and I have not tried out the method yet...just contemplating. ;)

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