Can We Profit By Buying Stocks On Dividends?

Besides the usual “buy low, sell high” strategy of investing in the market, some investors attempt to buy stocks “on dividends.” It is nothing complicated, just spend a few minutes to identify stocks about to issue dividends and then sell it shortly after the ex-dividend date. Ideally, you should make the sale at a profit to your original investment.

You can check the stock exchange for announcements of individual stocks to see when is the day the stock goes ex-dividend (meaning you are no longer entitled to the dividend).

The date is important for you to plan when you enter the market, as I am sure you do not want your cash tied up for too long, unless it is a blue chip stock and you are comfortable placing it in in your portfolio.

In most cases, the stock price will rise upon announcement by the company as a dividend payout affirms that the business is profitable and there are strong cash reserves. Investors will rush in and some will be buying for the dividend itself.

Once the stock becomes ex-dividend, the stock price will fall. This is mainly to reflect a lesser cash and current assets position and can be estimated based on the dividend issued. Usually, no drastic change in either direction is expected unless extraneous circumstances emerge.

In a bull market, the price of the stock can hold its own and can even increase after a temporary drop in value. But in a flat or bear market, such an approach has to be implemented with caution. Sometimes you have to hold the stock for weeks or months in order to sell the stock at a profit. For short term traders, this is undesirable as your cash is static.

Work out your own calculations to determine if the dividend paid out can cover your transaction cost and a possible loss in investment right after selling.

If the dividend is attractive enough to give a net return, then what do you have to lose, except for the few minutes to check things out, followed by a few days of waiting?

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Filed under Stocks

2 Responses to Can We Profit By Buying Stocks On Dividends?

  1. A chatbox would be a nice addition =)

  2. Pingback: stock dividends

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