Understanding two key dates are significant for the dividend investor when investing in dividends.
Here’s an example.
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The picture below shows the dividend pay-out for ARA Logistics Trust for Q42021:
If you had gone deeper into reading about the dividend entries, the dividends would have been 1.271 cents per share. So, if you own 1,000 shares, you would receive $12.71 in your bank account that will be credited after 4.30 pm to your bank account on the payment date.
The most important date is the Ex-Date.
What is Ex-Date?
If you own the stock before the ‘ex-date’, you will be entitled to the dividend. Using the above example, suppose you buy 1,000 shares on 1 Nov 2021. You will be entitled to $12.71 to be paid on 26 Nov 2021. If you buy a day late on 2 Nov 2021, you will get nothing on 26 Nov 2021.
Should you trade your dividend stocks before ex-date?
One question traders ask themselves is whether is it worthwhile to trade before you get entitled to a dividend.
To do this, you can perform either one of the following trades:
- Buy the stock on 1 Nov 2021, sell on 2 Nov 2021. Collect dividends on 26 Nov 2021.
- (If you already own the stock) Sell the stock on 1 Nov 2021, buy on 2 Nov 2021.
In 1961, Modigliani and Miller theorised that the drop in the stock value should be exactly equal to the dividends given out.
But in practice, this is not possible because dividends are given out in more decimal places than stock prices can adjust in response to them. ARA Logistics Trusts is traded in denominations of 0.5 cents, but its dividends were 1.271 cents. It is more likely to drop 1 cent or 1.5 cents on ex-date.
In 1955, researchers working on the London Stock Exchange found that stocks generally drop less than dividends. The drop is around 90% of dividends given out, giving some credibility to the Ex-Dividend Day Anomaly, which means that buying a stock a day before ex-date and selling it on ex-date can be profitable.
If you dig into the academic studies further, many factors determine the extent of the drop on ex-date. A 2017 paper from a business school in Portugal suggested that stocks with higher volatility have a more significant reduction on ex-date for stocks in London. Also, academics found that closely held stocks suffer a lower drop on ex-date.
For ARA Logistics trust, the stock was closed at $0.90 on 1 Nov 2021. On 2 Nov 2021, it closed on $0.89. Your profit from buying 100,000 shares on 1 Nov and selling them the next day would be $271 after collecting dividends on 26 Nov 2021, which brokerage fees would easily wipe out.
As brokerage fees eliminate the profits from this anomaly, a detailed backtest and study on the ERM portfolio are currently unjustified. Therefore, readers are advised not to trade based on ex-date and, instead, should treat dividend stocks as something to hold and enjoy over the longer term.
Instead of chasing ex-dates, you could improve your performance by picking better dividend stocks. I share how at my upcoming live webinar.
