Stocks such as Telstra and the banks paying significant franked dividends frequently see a rise in their share price and an increase in volatility prior to going ex-dividend.
Dividend payments are announced with the annual or half yearly report, a few weeks prior to the ex-dividend date.
Increased dividend related buying demand is met by trader/investors looking for profit on the short side. The annual/half yearly report might provoke a negative response. Furthermore buying demand tends to fall off after going ex-dividend. It is a speculative but frequently successful play.
Retirees and long term retail investors rely on their dividend stream for income. They may have acquired their shares years previously when they were much cheaper; returns with the franking credits could then exceed 20%.
They profit by ignoring the many price fluctuations in favour of long term appreciation. Their strategy fails in non-trending and bearish markets; it is then a problem when they need to sell to realize on their investment.
There is an alternative strategy that may sometimes be helpful. If on the day that the shares go ex-dividend, the price fall is less than, or no more than the value of the dividend payment, shareholders have the option to sell, still receive the dividend payment, and benefit from any subsequent price decline when the market outlook is bearish. The share price may well continue to decline.
If on the other hand the outlook is more positive, any post-dividend decline becomes a buying opportunity.
The market rarely provides pots of gold; but can provide steady returns from the profits of industry.
Categories: Trading opinion