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Thread: Dumb Investment Question...

  1. #1
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    Dumb Investment Question...

    Asking for a friend.

    So, I am familiar with stocks that pay dividends

    My question, er, my friend's question is, "Why not purchase dividend paying stocks before they declare the dividend, hold it and then sell it after the day of execution?"

    The buyer reaps the dividend and assuming the stock does not nosedive after the announcement, those funds could be used to move on to other similar transactions.

    A few months ago, I happened to run across a stock that is paying over 10% dividends. I purchased and immediately scored a payout. In this case, kept the stock as it has increased in value and today netted me another nice payout. Much more than if the same funds were in a savings account or similar vehicle.

    eta...TPVG is the referenced stock.

    Thoughts?

    Friend,

    Wes

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    Senior Member Roy Richardson's Avatar

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    Re: Dumb Investment Question...

    Quote Originally Posted by Wes Smith View Post
    Asking for a friend.

    So, I am familiar with stocks that pay dividends

    My question, er, my friend's question is, "Why not purchase dividend paying stocks before they declare the dividend, hold it and then sell it after the day of execution?"

    The buyer reaps the dividend and assuming the stock does not nosedive after the announcement, those funds could be used to move on to other similar transactions.

    A few months ago, I happened to run across a stock that is paying over 10% dividends. I purchased and immediately scored a payout. In this case, kept the stock as it has increased in value and today netted me another nice payout. Much more than if the same funds were in a savings account or similar vehicle.

    eta...TPVG is the referenced stock.

    Thoughts?

    Friend,

    Wes
    I believe that they set a retroactive date when they annouce the dividend - stockholders as of [date] - to keep people from churning the stock

    Dividend dates[edit]
    A dividend that is declared must be approved by a company's board of directors before it is paid. For public companies, four dates are relevant regarding dividends:[8]

    Declaration date — the day the board of directors announces its intention to pay a dividend. On that day, a liability is created and the company records that liability on its books; it now owes the money to the stockholders.

    In-dividend date — the last day, which is one trading day before the ex-dividend date, where the stock is said to be cum dividend ('with [including] dividend'). In other words, existing holders of the stock and anyone who buys it on this day will receive the dividend, whereas any holders selling the stock lose their right to the dividend. After this date the stock becomes ex dividend.

    Ex-dividend date — the day on which shares bought and sold no longer come attached with the right to be paid the most recently declared dividend. In the United States, it is typically 2 trading days before the record date. This is an important date for any company that has many stockholders, including those that trade on exchanges, to enable reconciliation of who is entitled to be paid the dividend. Existing holders of the stock will receive the dividend even if they sell the stock on or after that date, whereas anyone who bought the stock will not receive the dividend. It is relatively common for a stock's price to decrease on the ex-dividend date by an amount roughly equal to the dividend paid. This reflects the decrease in the company's assets resulting from the declaration of the dividend.

    Book closure date —when a company announces a dividend, it will also announce a date on which the company will ideally temporarily close its books for fresh transfers of stock, which is also usually the record date.

    Record date — shareholders registered in the company's record as of the record date will be paid the dividend. Shareholders who are not registered as of this date will not receive the dividend. Registration in most countries is essentially automatic for shares purchased before the ex-dividend date.

    Payment date — the day on which the dividend cheque will actually be mailed to shareholders or credited to their bank account.
    Last edited by Roy Richardson; April 17th, 2017 at 11:50 AM. Reason: more info
    Thanks Wes Smith - "thanks" for this post

  3. #3
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    Re: Dumb Investment Question...

    Very generally speaking, the declaration and payment of the dividend is likely already included in the stock price. Companies who pay dividends generally do so on a regular basis (e.g. Quarterly), and the amount of the payment is also regular (some number of pennies per share). Rarely does a Company who has never paid a dividend come out and pay a large one. Conversely, a company who regularly pays dividends rarely cuts back significantly. So someone selling you a stock 2 weeks before a dividend date knows that they are giving up a portion of their ownership in the company, in addition to that soon-to-be-announced dividend.

    Your idea would work in a situation where the company doesn't normally pay dividends, and you buy it just before an unexpected payout. And it would be very hard to find such a situation, and impossible to do so on a regular basis. And even if you did find that rare case, market theory would say that the price of the stock will go down after such an event, since paying out a dividend decreases the overall value of the company. So at the end of the day, you have a nice dividend, but then a lower stock price, and it should wash out. Not that market theories really play out in reality, but hopefully you get the point.

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    Naznet Owner Dave McClung's Avatar

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    Re: Dumb Investment Question...

    Wes

    While the approach you suggest might work, all of the studies have shown that "market timing" doesn't work over the long run. What you are describing is a strategy for market timing.

    As for the specific example you mentioned, it is highly unusual for a company to declare a 10% dividend. That would usually indicate that the company has a lot more cash on hand than management can productively employ in its business. Sometimes a company will declare a large dividend to prevent a potential hostile takeover. In any case, a 10% dividend is an indicator that something unusual is going on in the company.

    As I understand your questions:

    1) Does "market timing" make sense for an investor like you and me? In my opinion, it does not. The book I have mentioned several times answers that question for me -- The Little Book of Common Sense Investing by John Bogel. In that book, Bogle presents a strong argument even one who consistently makes "good" investments will be overcome by the transaction costs of market timing.

    2) If one chooses to try market timing, does it make sense to base the timing decisions on the declaration of dividends? I could see a strategy of investing in companies that announce larger than normal dividends. Larger than normal dividends are an indication that things are going well. But, why sell as soon as the dividend is collected? Often, the stock of a company paying out dividends will climb, not because of the dividends, but because the business is generating enough positive cash flow to pay the dividends.
    Thanks Wes Smith - "thanks" for this post

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    Naznet Owner Dave McClung's Avatar

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    Re: Dumb Investment Question...

    Wes

    Several years ago, I experimented with my own investments. I took a fixed amount for "active investing" and the rest for "passive investing." After about 4 years of doing my best to beat the "passive investing," I found that I was not smart enough. My active investments did well. The return was better than the average investor, but the passive investments did even better.

    In answering the question of why I didn't do better, I found that I made the mistake of investing in only "good" companies -- companies with names, products and services that you would immediately recognize. Those companies did well, but the better returns came from companies that were not expected to do well. Some of the companies with the best returns were companies I had never even heard of and their business was in areas that I didn't know about. Since I have changed to strictly "passive" investing, my returns have improved.

    By investing in an index fund, like VTI, I invest in not only the "good" companies but in all of the other companies too. VTI holds a little bit of every company in the U.S. Stock Market. In fact, it's portfolio is designed the mirror the total stock market. I don't pay much attention to the DOW Jones Industrial Average or the S&P 500. Those reflect the gain of the big companies, but don't reflect what is going on with small companies. Many times, the small companies grow faster than the big ones.

    Additional Information -- When I discuss investing, I am referring to only the portion of my assets that are invested in public companies. Different rules apply to investing in privately held companies. The risks are significantly greater and the potential rewards are also greater in privately held companies. Approximately 1/3 of my assets are in public companies, 1/3 in a privately held company, and 1/3 in real estate.
    Thanks Wes Smith, John Kennedy - "thanks" for this post

  6. #6
    Naznet Owner Dave McClung's Avatar

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    Re: Dumb Investment Question...

    Quote Originally Posted by Wes Smith View Post
    Asking for a friend.

    So, I am familiar with stocks that pay dividends

    My question, er, my friend's question is, "Why not purchase dividend paying stocks before they declare the dividend, hold it and then sell it after the day of execution?"

    The buyer reaps the dividend and assuming the stock does not nosedive after the announcement, those funds could be used to move on to other similar transactions.

    A few months ago, I happened to run across a stock that is paying over 10% dividends. I purchased and immediately scored a payout. In this case, kept the stock as it has increased in value and today netted me another nice payout. Much more than if the same funds were in a savings account or similar vehicle.

    eta...TPVG is the referenced stock.

    Thoughts?

    Friend,

    Wes

    Wes

    I am always interested in people's investment strategies. The more I study the issue the more convinced I have become that most of the investment strategies being presented by the "professionals" are flawed. Why? Because the strategies are based on the assumption that investment return and spending are not connected. The most common approach I see is to attempt to produce a 4% investment return over the long run. Many of the investment professionals suggest that a 4% return is "normal."

    Compare that return with VTI (Vanguard Total Stock Market Index) which has a 15 year record of returning 7.68% compounded return. (That includes the stock market crash of 2008.) The most recent 5 years of VTI returns have been 13.32%.

    Why would one accept a 4% return strategy? The professionals point to "emotional factors." Experience has shown that when stock prices fall, many people sell their stocks at or near the bottom. The assumption is that one needs to accept a lower level of returns to protect themselves from their own stupid actions. I don't accept that theory. In 2008, when stock prices fell, I lost a lot of net worth on paper, but I lost nothing in reality. I still owned the same shares I owned in 2007. When the stock prices came back, I regained all of the paper losses.

    If one can follow a simple discipline, one can increase their returns safely. 1. Don't buy or sell investments based on emotion. 2. Sell investments only when you need cash. 3. Manage your cash needs by deferring optional spending until stock prices are up. 4. Keep six months of spending in cash reserves so you aren't forced to sell investments when prices are low.

    PS: While it doesn't boost your investment returns, it is a good idea to contribute stock when prices are up, like now. Linda and I have used VTI shares to fund our Donor Advised Fund at the Church of the Nazarene Foundation. We got a charitable deduction for the full value of the shares and did not pay capital gains tax on the amount the shares increased while we owned them (more than 30%).

    Over many years, I have obtained an average return in excess of 12%. With discipline, one doesn't have to settle for 4% returns.
    Thanks Billy Cox, Wes Smith, Gina Stevenson - "thanks" for this post

  7. #7
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    Re: Dumb Investment Question...

    I probably should have been more specific in my question.

    For the past 9 months serving as an interim pastor I have had some extra income that isn't necessary to our needs and wants, so I have been having some fun seeing what I can do to invest and increase the corpus of the fund.

    I have two ETFs that I have shares in: PGHY and VOO. VOO has increased in price by about $7 per share and has paid some dividend. PGHY has decreased a few cents in share price since I purchased it and has paid some dividend. Both of these are long term growers, but steady and historically reliable.

    What raised the question for me is that in my research, I ran across a stock that has a dividend of just over 10% per year...TPVG. I purchased 100 shares in December and quite quickly netted a dividend payout of $36. Then, over the past few months I have increased the number of shares to 290 and just in the past couple days gained another $104.00 dividend payment. With the dividend payment and increase in stock price on this particular stock, my gain since December on this stock is +7.26%.

    My intent for the future of this pool of money is not long term. My hope is to increase it as much as possible during the coming year as Josh, Jamie & Alex and Colleen and I are planning an African Safari for the summer of 2018. Just a thought...I would be happy to extend for a couple weeks if you and Linda would like to hike in Kenya!

    So my question is more "short term." I was/am wondering about purchasing dividend paying stocks, harvesting the dividend and moving on to another.

    Friend,

    Wes

  8. #8
    Naznet Owner Dave McClung's Avatar

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    Re: Dumb Investment Question...

    Quote Originally Posted by Wes Smith View Post
    I probably should have been more specific in my question.

    For the past 9 months serving as an interim pastor I have had some extra income that isn't necessary to our needs and wants, so I have been having some fun seeing what I can do to invest and increase the corpus of the fund.

    I have two ETFs that I have shares in: PGHY and VOO. VOO has increased in price by about $7 per share and has paid some dividend. PGHY has decreased a few cents in share price since I purchased it and has paid some dividend. Both of these are long term growers, but steady and historically reliable.

    What raised the question for me is that in my research, I ran across a stock that has a dividend of just over 10% per year...TPVG. I purchased 100 shares in December and quite quickly netted a dividend payout of $36. Then, over the past few months I have increased the number of shares to 290 and just in the past couple days gained another $104.00 dividend payment. With the dividend payment and increase in stock price on this particular stock, my gain since December on this stock is +7.26%.

    My intent for the future of this pool of money is not long term. My hope is to increase it as much as possible during the coming year as Josh, Jamie & Alex and Colleen and I are planning an African Safari for the summer of 2018. Just a thought...I would be happy to extend for a couple weeks if you and Linda would like to hike in Kenya!

    So my question is more "short term." I was/am wondering about purchasing dividend paying stocks, harvesting the dividend and moving on to another.

    Friend,

    Wes
    The last time I went on a Safari, I observed a lone hiker walking through the game preserve. I am not sure I am brave enough to hike in lion country. Your return of 7.26% since December is really good. VTI, the fund that I use, has only increased 5.68% since year end.

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