There is some debate as to how to choose which stocks to buy to earn dividends. There are some important considerations, including frequency of payout, yield, last increase, and most importantly price recovery after a dividend is paid out.
Y'see, on what is called a stock's Ex-Div day, the share price of the stock drops by the amount of the dividend. Some stocks recover within just a few days to where it was before the dividend, but there others that historically take weeks. The reason this could be important is you want to be sure you're buying a stock with growth potential as an appreciating asset, as well as being able to exit the stock at breakeven or profit, but not at a loss.
A great website with free tools is Dividend.com. They have all this information and have their own ranking system for the best dividend stocks for different goals. In fact, may well know websites reference Dividend.com because of the wealth of data and analysis.
For us here, let's review some of the terminology to get you started:
Dividend: is a distribution of some of the company's money as a reward for being a shareholder. Can be paid out monthly, quarterly, annually, and in some instances there can be "special dividends".
Yield: is the dividend divided by the share price to give a percentage. This allows you to compare apples to apples across stocks.
Cum Dividend: means "with" dividend. So, your shares are cum dividend up until the ex-dividend date.
Ex-Div Date: is the date that the stock no longer carries a dividend, so is typically the day the the dividend is taken out of the share price
Record Date: people who buy the stock on or before the Record date are entitled to a dividend. This is usually automatically recorded when someone buys stock in a company.
Payment Date: is the date that the dividend checks are mailed to shareholders or when the company credits brokerage accounts.
Declaration Date: is the date on which the board of directors announce its next dividend payment
Recovery: how many days it takes for a stock to reach pre-ex-div share price. So, if you sell the stock after receiving the dividend, you are not selling the stock at a loss.
You can take advantage of dividends in a trading account or an IRA. Another smart way to play dividends is with Dividend Reinvesting Plan or DRIP. Your dividends will be automatically used to buy fractional shares of the same stock, thereby compounding the dividends you earn on more stock!
Did you know there is a way to swoop in, get paid in dividends, and swoop out? It's called Dividend Capture strategy. It could be a way to add a chunk of change to your income.
Investopedia.com has a lot of learning resources including a page on how a Dividend Capture strategy might work and is a little easier to understand for newbies than Dividend.com.
Look for a stock with good, steady upward growth, has a low price recovery period, has a history of increasing dividends, and has a reasonable yield. You can enter these as filters on
Dividend.com to search for ranked stocks for this strategy. If you want access to their proprietary ranking on dividend stocks, they offer a premium membership for $149/year. The site has a lot of free tools too.
The basics are that, once you find a good stock to buy, buy the stock any time before the Ex-Div date. You could even buy the stock the day before the Ex-Div date.
Then, on the Ex-Div date, the share price will drop as the dividend is paid out to you.
Once the share price recovers to at or above what you purchased it for, you can sell the stock and move on to the next stock with a dividend.
Keep in mind that since you may be owning the stock for a few weeks or less, that your gains on these dividends may be taxed at a higher rate called a short-term capital gain tax.
So, you'll need to either calculate or ask your accountant what your approximate short-term capital gains tax might be in order to see if it's worth attempting this strategy.
Risk: there is some chance that the stock takes a really long time to recover its pre-Ex-Div price or could possibly never recover, at which, you may have to cut your losses and sell the stock at a loss.
A different way to accumulate more dividends is to assemble a list of stocks that offer quarterly dividends and have ones that pay on different quarterly cycles:
Please note that this is not financial or trade advice. Do your own research and there is risk of 100% loss. Do not trade with any money you are not willing to lose. And do your own research.
But this site and blog is meant to give ideas to people that maybe there were not aware of.
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