Dividend Play Strategy

1st Sep '18 by Dave_17

3 comments 1812 reads

Hi

I'm looking to see if anyone has explored this type of strategy and/or has any thoughts before I investigate it further. I received a few mails from an ADVFN partner (Accendo Markets) on “dividend plays” Accendo Markets.

The general strategy is to buy specific FTSE100 companies before xd date (using CFDs), collect divi’s, hold until share price recovers from the inevitable xd share price drop, then sell.

The specific FTSE100 companies would be those that have a proven record of either dropping less than dividend or quickly recovering.

My initial thoughts are
1. It’s too simple/good to be true
2. It “may” work in a some cases in a strong bull market but probably falls apart in flat/bear market
3. Margins may be so thin it's not worth it (but partly addressed by using CFDs according to Accendo)

Any thoughts?

Dave

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pka

1st Sep '18

Transaction costs, in the form of bid-offer spreads, stamp duty and stockbroker's commission, would greatly reduce the potential profit from this strategy.

Gromley

2nd Sep '18

It is an idea that has briefly crossed my mind in the past (more like scrapped the surface before being rebuffed).

Admittedly without having researched it, it just seems a very poor risk vs reward profile to me.

Presumably you would be looking to scalp 2-3% per trade; the only circumstance where I can see you would make more on any trade would be if the price 'gaps up' whilst you are holding. On any slow and steady price increase you would be selling out presumably once the dividend gap is closed, thereby having no further exposure to the climb.

On the other hand if there was a slow and steady decline, how long would you hold on for before cutting your losses?

Even with a hard stop loss at say 5% you would need to be right 2 times out of 3, just to break even (before considering spread/trading costs) even at a 90% success rate you would only be making an average 1.75% per (based on +2.5% per win and -5% per loss).

The occasional 'gap-up' could of course boost your returns but any 'gaps-down' would wipe out your gains.

So for me as stand-alone approach it looks like a bit of a non-starter.

However, having thought this through it occurs to me that it could be a worthwhile consideration in timing buys and sells that one would be making in any case.

For many, it would probably be considered too much effort to pursue an idea that might improve annual returns by may a couple of percentage points. I am, however, a strong believer in the aggregation of marginal gains (probably just as well a this year the aggregated gains on my long portfolio have in the most part been pretty marginal) so I think it is something worth adding to list of research possibilities.

It should be fairly easy to back-test whether there is anything sufficiently material to prove the concept. Much harder though I think to test whether allowing 'timing' decisions to be influenced by ex-dividend dates would tend to over-ride other important buy/sell "triggers".

I will hopefully come back to this in due course, but in the meantime if anyone else has any practical experience of this, it would be great to hear.

sharw

Dave-

I think you've already summed it up yourself:

1. It’s too simple/good to be true - if it was everyone would do it and it would then no longer work
2. It “may” work in a some cases - yes but even in a bull market it won't in others and that will subtract from any gains
3. They would say that - they specialise in CFDs.

The main problem, as Gromley says above, would be deciding your timing rules so let's look at two examples:
The first is well-known FTSE1OO income share Imperial Brands (LON:IMB) :

On 22nd Feb. it went ex the final 59.51p. Now when are you going to sell? On the 26th for a 30p less expenses profit? But at that time it looks as if it is going back up and you can reap 60p. You would actually have had to wait until May 9th for it to get back to your purchase price.

Here is another nearer to home for me - Restaurant (LON:RTN) :

I bought this years ago at 50p and have done well but the company hit some bad management and I have been selling down. I decided to exit my final tranche on June 6th, the day before it went ex the 10.6p dividend. Knowing my luck it should have bounced back after that but no - see for yourself. It did get back to 292.6p last week but still not to the point where I would have been better off holding. So - the big question is what your system would tell you to do and how many 'good' trades would be needed to make up for it?

Dividend Play Strategy

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Dave_17

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