Ex Divided dates and turning a profit?

Biggles

mark260311 wrote: »

Exactly - Hard won, so it feels like I worked for something
Small - but will the same value I win will be added to the pot and will grow over time.

You're missing the point, which is that most trades will be losing ones, for the reasons that are given above, and that the few gains will be small and dependent on other factors (like the market or the share price rising due to some other random factor). The pot will actually shrink over time. A fairly short time, actually.

This question gets asked a couple of times every year; most people eventually understand that the method cannot be successful. If you think otherwise, then go ahead by all means.

mark260311

bowlhead99 wrote: »

Not sure if you are just trolling. If you don't understand, don't invest.

Definetly not trolling. Reading got me to this conclusion in the first place. Granted the reading I have done may have been skewed by affilite links and what not so may have been fairly one sided.

This is the first time in my adult life I have had extra money, something that is mine that I worked for and I want to feel like I am doing something useful with it. The more reading I do the more is seems like a long term investment is going to be the only option.

thanks for the comments.

ChesterDog

It would be worth having a read of Monevator.com, especially (no offense intended) the beginners lessons. Generally speaking, I think most would agree that the more carefully you make your investment choices, and the less tinkering you do with them, the better they will perform for you. Often, that can mean a reliance on more passive investments for much of a portfolio.

mark260311

Cheers Chester - I will have a look!

Wilkins

mark260311 wrote: »

This is the first time in my adult life I have had extra money, something that is mine that I worked for and I want to feel like I am doing something useful with it. The more reading I do the more is seems like a long term investment is going to be the only option.

There's nothing wrong with buying shares ex-div, just don't make it the cornerstone of your strategy. Generally, you make money on the stock market by buying good quality companies and holding on to them for a long time. The odd trading opportunity does arise, particularly in periods following a market crash, but selling out after small gains is not likely to work for most people. Usually, I wait until the s.p. has doubled before I think about selling and, even then, I tend to sell half only.

Northern_Light01

I'm a novice to the share buying game and even I can see that this strategy is fatally flawed. And all I needed to do was read many of the posts from the experienced investors above!

I have came to the conclusion that if I was to invest in shares because of the dividend yield I would adopt the following simple strategy:

1. Buy em.
2. Hold em.
3. Reinvest the divis.

This way, you are over time gaining a few "free" shares and benefitting from the so called compounding effect, ie the more shares you hold, the more the dividend.

Of course, this depends on other outside factors such as the dividend not being cut or even worse, stopped altogether. Then again, the divi might increase and over time the share price may even rise to the point where you might consider selling for a decent profit.

Then again, I, just like you, are a fellow greenstick when it comes to the workings of the stockmarket. More experienced posters will no doubt find holes in my logic, even though I think it has a sounder basis than your plan. Whatever you choose to do, best of luck to you!

Northern_Light01

mark260311 wrote: »

Definetly not trolling. Reading got me to this conclusion in the first place. Granted the reading I have done may have been skewed by affilite links and what not so may have been fairly one sided.

This is the first time in my adult life I have had extra money, something that is mine that I worked for and I want to feel like I am doing something useful with it. The more reading I do the more is seems like a long term investment is going to be the only option.

thanks for the comments.

Like me, you have done a very wise thing and have came to these forums!

While you will not get specific and exact advice on what shares or investments you should consider, you will be steered away from making bad decisions like what you have suggested.

Northern_Light01

i

le_loup wrote: »

The share price is not only affected by buying and selling. When a share goes ex-dividend the company is actually worth less. Some of its assets have become liabilities; its balance sheet is smaller.
If you know so little about the value of companies, it would be best for you to avoid shares altogether, put your money in the Post Office and do some intense studying. I say this only to protect you from yourself.

From an accounting point of view, this is correct, but as has already been mentioned, both the amount of dividend and the date of payment are known.

But the OP might want to read up on the most basic fundamental things when trying to value shares, starting withe the price/earnings ratio. As he is seeminly interested in dividends, why should he not be looking at the dividend cover, which focuses on the company's ability to actually pay the dividend from its earnings?

bowlhead99

Northern_Light01 wrote: »

le_loup wrote: »

The share price is not only affected by buying and selling. When a share goes ex-dividend the company is actually worth less. Some of its assets have become liabilities; its balance sheet is smaller.

From an accounting point of view, this is correct, but as has already been mentioned, both the amount of dividend and the date of payment are known.

I'm not sure I follow the reply, i.e. "...but the amount and date are known" in the context of the previous comment, which didn't suggest that either of these were unknown?

Actually though to be picky, "from an accounting point of view" the analysis by le loup is not correct in terms of its balance sheet getting smaller on ex-div day as stated by le loup and agreed by Northern Light The balance sheet gets smaller quite a while before ex-div day, because as soon as the dividends are declared (which could be weeks earlier) the company then has dividends payable, which is a liability in the accounts; it represents an obligation to pay. For the benefit of those new to the concept of dividends, an example:

- Directors agree on 1 November to pay a 2p per share dividend to shareholders who are on the register at close of business on 15 November. The payment date is "on or before 31 December".

- On 1 November, the company has a liability for the amount payable and the balance sheet shrinks at that point.
- In mid November, from the company's perspective, nothing happens.
- In late December, the company pays out the cash. Its liability goes away but it now has less cash, so its net assets are unchanged.

From the investor's perspective:
- On 31 October, the investor owns an ordinary share in a company, giving him a pro rata entitlement to its assets on a winding up, and to its future profits. The assets include a lot of cash in the accounts. The share is trading at 100p.

- On 1 November, the investor now knows a dividend is coming. The company has a liability now to pay out 2p a share, so while it still has the same cash and other assets, it has lower 'net assets'. The investor now owns a pro-rata share of all the company's (reduced) net assets and future profits (which might be worth 98p), and he also owns the rights to receive a dividend of 2p in December.

The shares are trading 'cumdiv', i.e. with the rights to receive this declared dividend. So someone might pay you 100p for the shares carrying those rights, because the whole thing together (98p ongoing company value and 2p agreed dividends) is worth 100p like it was the day before.

As a side note, the market news that the company has chosen to pay out 2p dividends out of its cash pile, rather than 0p or 10p, and accompanying statements about what it will be doing with its cash in future (e.g. looking to pay similar or increased dividends in future, which some investors will like - or perhaps not pay dividends to allow the money to be invested in projects instead, which some investors will like) might change people's perception of the company for better or worse. So the 98p element of the 100p share price might go up or down. For simplicity let's say it doesnt!

- The dividend is only going to shareholders on the company's official register at close of business on 15 November. On the London Stock Exchange as standard it takes minimum 3 business days to settle a trade (i.e. if you agree a trade, you have committed to exchange your cash for a share or vice versa, 3 days later - or longer if you agree an extended settlement period).

So, knowing this, if you agree to sell your share on 13 November, the new buyer's name won't be on the register at close of business 15 November. The 3 days means he will only be on the register on 16th or later. So he will not get the dividend in his bank or broking account in December, you will get it instead even though he owns the shares all through late November and December. You have sold it to him 'ex' dividend. He has bought a share of the company's net assets and all FUTURE declared dividends, but for the purpose of this current dividend when they look at the registers at 5pm on the 15th, you technically owned the share - even though you had agreed to sell it.

So, on say 12 November you could have sold the share for 100p CUMdiv, with the rights to receive dividend. On 13 November you can't sell it with the rights to receive dividend, because there isn't enough time to settle the trade before the company's internal deadline of 15th. So on 13 November the shares trade EXdiv. The value of a share without the rights to the known 2p dividend in December is clearly 2p less than the value of a share was with the known 2p dividend. It should trade at 98p instead of 100p. QED.

If it happens to trade at anything other than 98p (99p or 100p or 101 -yay-, or 97p or 96p or 95p -boo- ), that's just the unpredictable market noise that the average punter cannot possibly hope to exploit on a one day trade.

I'm pretty sure we're all agreed on this but for new investors it was perhaps worth clarifying where these terms come from and how the individual investors' positions are affected versus the company's own position that you can see in the accounts. And also how to interpret the various dates you see in the dividend announcements released by the company.

The flip from being worth 100p to 98p is exclusively driven by a change in the individual owner's status, selling the share with dividend rights one day and without the next. From the company's perspective it knew it was paying out the 2p back on 1 November and it doesn't care who it's paying to, so nothing changes until the last week of December when it writes the cheque and doesn't owe the 2p any more.

See, you have to be careful saying 'from an accounting perspective' when qualified accountants are on the board!
:beer:

But the OP might want to read up on the most basic fundamental things when trying to value shares, starting withe the price/earnings ratio.

True, reading is a sensible thing to do for anyone new. P/E is one useful measure amongst many. Dividend payout ratios, dividend cover, interest cover, gearing and all sorts of other ratios can be handy to help you understand a company's financial strength.

If you aren't going to bother trying to understand a company's position and prospects it's much more of a gamble. Buying funds is easier because you are just looking at types of companies to hold and not individual companies; fantastic gains on some and uncomfortable losses on others all dilute each other and you hope to get some sort of reasonable result without it being so much of a gamble.

As he is seeminly interested in dividends, why should he not be looking at the dividend cover, which focuses on the company's ability to actually pay the dividend from its earnings?

Well, I don't think anyone had suggested that you shouldn't look at dividend cover when assessing a long term investment. The OP was not trying to assess a long term investment though, and dividend cover - which aims to tell you whether that one specific company might be able to sustain its ability to pay out similar dividends next year - is entirely irrelevant for a one day trade.

His interest in dividends was simply on whether there was perhaps something exploitable to churn through little profits here and there which would add up. The answer of course is no, if you could just get reliable profits from cheeky one day trades with a positive expectation rather than a break-even or loss-making expectation, then we would all do it.