Looming dividend payments during February and March offer investors a potentially "free" pick-up by buying stocks before the ex-dividend dates - but it remains an inexact science.
The "free pick-up", or dividend harvest, lies in the share price not falling by the full amount of the dividend being paid, as is generally expected, so the buyer gets the dividend and resells the share, making a small gain on the difference, Craigs Investment Partners broker McIntyre said.
"Many share prices either fall by less than the dividend, or recover the dividend paid in just a few days," Mr McIntyre said.
In a research sample of nine stocks paying dividends a year ago, during March, Mr McIntyre said that after adjusting for any share price movement, the companies showed an average return of 1.7% for the two days after going ex-dividend, rising to 2% a week after having gone ex-dividend.
If the market was "working efficiently", those companies should have returned close to 0%; with the dividend payment offset by the share price fall, he said.
However, Mr McIntyre cautioned that the ploy was exposed to "fickleness" in the market, where a sudden fall in the wider sharemarket could swamp any dividend effect.
The strategy, while not fool-proof, is derived from well-established companies and would suit new investors looking to establish portfolios and immediately get dividend returns, or those with a "trading approach" to portfolio management of dividend stripping; making gains from a combination of share growth gain and dividend yields, Mr McIntyre said.
For those investing for income from dividends, as opposed gains through long term share price growth; purchasing before the ex-dividend deadline date offers a "potential pricing anomoly" where there is the scope for extra returns, he said.
While the average returns of the nine companies was 1.7% for the two days after going ex-dividend and 2% after a week, best performers Cavalier stock offered respectively 2.2% and 4.4% for the periods while Freightways stood at 2.8% and 3.7%.
Mr McIntyre said one explanation of the pricing anomaly was that some investors sold the stock before dividend payments because they did not want income derived from dividends and instead preferred to take gains from share price growth.
"Whatever the driver, it does provide a potentially profitable market timing strategy for those who do invest for income," he said.
GOING EX-DIVIDEND
When shares go ex-dividend, the share price generally falls by the dividend amount; eg $1 share paying 5c falls to 95c. After the dividend payment, it is expected to slowly recover to $1 in following months. The gain is made if the share declines to only 97c, or subsequently recovers quickly to $1 or more. Purchasing shares after the ex-dividend deadline date means you do not get the dividend.
