Buying Dividends in the Wake of QE3
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What do you get when you mix ex-dividend dates, decent yielding stocks and quantitative easing? Depending on who you ask, the answer is a lucrative investment strategy, or a highly risky and scandalous way of trying to get rich quick.
Regardless, I thought to go over the strategy because of all the factors ining up to make it worth the consideration. I’ll discuss some of the companies that go ex-dividend during the last weeks of this month that may make for some interesting buys.
The strategy I am referring to is most commonly called "dividend capturing" or "buying dividends." This means buying the stock of a company with the sole purpose being to cash in on the impending dividend payout. This investor has little interest in the stock, as the plan is to sell it as soon as possible, which is after the ex-dividend date.
The strategy works like this. Prior to a company’s ex-dividend date, usually two or three business days before it, the investor would purchase however many shares they want of the company's stock. The goal is to be a shareholder of record, which is required to receive the dividend on the payout date. Then, after the ex-dividend date, the onus is on the buyer to sell the stock as soon as possible. They’ll have their fingers crossed, hoping that they will be able to sell the stock for the same price, or better yet, a higher price, than they got when they bought it. If not, they’ll have to hold on to a stock they may not really want, or suffer a loss if the stock's price declines.
This brings me to my point about quantitative easing. On Thursday, Federal Reserve Chairman Ben Bernanke announced the third round of quantitative easing, or QE3. The process entails the Federal Reserve buying mortgage backed bonds to add to its holdings of long-term securities. The move leads to lower interest rates, with the primary goal of the move being to stimulate the economy and improve the country’s stagnant job growth. Though criticized by skeptics as a risky way to stimulate the economy, many Wall Street players love it. This has usually led to a rally in the market on each of the previous times the Federal Reserve used the tactic.
Already, we are seeing a rally since the Q3 announcement. In fact, U.S. stocks rose for a fourth straight session on Friday, closing in on their highest levels in five years.
If this trend continues for the next few weeks, the buying dividend strategy could work in an investor's favor. Keep in mind that it could take weeks for the actual dividend to be paid. Also, consider the tax implications because taxes will have to be paid on the dividends.
Understand that this strategy is risky, just like any investment in which you stand to lose significantly if the market moves against you. You don’t want to buy stock in a company whose dividend is lower than the amount you could lose if the stock’s price falls below your purchase price. Furthermore, you should prepare yourself for having to hold the stock for a longer period than you may want.
So, I’ve taken the liberty of listing a few stocks that go ex-dividend in the coming weeks that could move up, but still be worth owning if they don’t.
General Electric’s (NYSE: GE) next ex-dividend date is Sept. 20. The payable date is Oct. 25 for shareholders who are listed as of the Sept. 24 record date.
It hit its 52-week high of $22.37 during intraday trading on Friday. Its dividend is $.68, yielding 3.1%.
Then there’s Dow Chemical (NYSE: DOW). Its ex-dividend date is Sept. 26. It pays a dividend of $1.28, yielding 4.1%. Shareholders of record on Sept. 28 will receive the payment on Oct. 30. By the end of close on Friday, it was up 2.61% for the day to $32.25.
Omnicare’s (NYSE: OCR) ex-dividend date is coming up on Sept. 20. It will be for shareholders of record as of Sept. 24, and will be payable on Sept. 28.
Omnicare’s dividend payout represents an increase of 100%. It is $.56, yielding 1.58%. The increase was announced last week by the board of directors. Omnicare closed Friday up 1.81% to $35.53.
TwillyD has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.