The Weekly Investment

Dividend Investing


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Dividend Capture

Because of my newfound interest in dividends, by the beginning of 2015 I was seeking to learn more information about dividend investing.  By researching I discovered an investment technique called “dividend capture”.  The technique involves purchasing a stock before its ex dividend date and selling it after receiving the dividend payout, usually a month after the ex dividend date.  In theory, a profit is earned by capturing the dividend.  Dividends can be captured weekly, or even daily, and become a source of passive income.  I liked the idea of marking the payout dates on my calendar because it is a visual reminder that I will receive multiple paychecks throughout the week.

I was able to immediately start dividend investing because most of my income was saved in savings accounts.  The bulk of my income was not in a 401k or 403b because I wanted to keep my income freed up in hopes of someday purchasing a home in full with cash.

On March 16, 2015 I purchased my first stock in my attempt to test the profit earnings of dividend capture.  I would purchase the stock before the ex dividend date and sell after the dividend was received.  I ended up purchasing a stock called White Horse Financial because it had a yield of 9.5%.  I spent $990.89, $12.77 per share, including a $7.95 commission, and waited to see if I could come out ahead.

WHF’s stock price dropped below my purchase price on the ex dividend date.  I was aware that this would happen through my research; the company adjusts the stock price downward to pay the dividend.  I wondered if the stock price would meet or exceed my original purchase price of 12.77 per share immediately after the dividend was paid out?

The dividend payout occurred on April 3, 2015.   The dividend was $7.34.  WHF’s stock price on April 6, 2015 was $12.67.  If I had sold at that time I would have received $967.64, this value includes the $7.95 selling commission.  If I had sold I would have sold at a loss of $23.25.  Selling at a loss was unacceptable.  I realized I could have held onto the stock until the price increased above $12.77 per share but did not want to hold onto the stock since holding onto it would tie up the money that I could be placing into fresh stocks with imminent ex dividend dates.

What I learned through my experiment with dividend capture:

#1  Commissions eat away at the profit that could be earned through dividend capture.  In my case the commissions alone cost $15.90.

#2  The stock price falls on the ex dividend date.  The price drop  will prolong selling the stock for a couple of months.  This delay disrupts the technique since holding onto capital diminishes the purchase of new stocks to fuel the next cycle of dividend payouts.

#3  I realized I could just hold onto the stock and avoid a second commission and receive the next quarter’s dividend payout…

I did not sell the stock and still have it to this day.  I was beginning to doubt the profitability of dividend capture but my enthusiasm about dividends did not wane.   I was continuing to research and was not deterred but still had more to learn.

 

 


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Investment Beginning

I began investing in 1999 when I was 26 years old and worked for a temporary agency.

During that time I often listened to a financial radio program hosted by Bruce Williams who consistently recommended opening a new form of IRA called a Roth IRA because of its tax free benefits. I decided to open an account.

The maximum annual contribution in 1999 was $2000.00. I saved and readied the maximum amount for investing with a nearby broker.  The process was very exciting: planning, selecting a broker, calling, making an appointment, and leaving work to go to the appointment. A moment in time on a cool autumn afternoon remembered to this day.

I was looking forward to opening my Roth IRA. I believed it was a wise decision because I was starting at an early age which would give the investment many years to grow.  Surprisingly, after being seated and speaking with the broker, I quickly grew uncomfortable towards the idea of having someone else involved with my investments plus paying them a fee. The question bore down on me, “Why is a middleman necessary?” I was under the impression that in order to invest one must go through a broker.

Ironically, I was working temporarily at Fidelity Investments. Because of my apprehension during the appointment I began to consider other ways to open an IRA. Knowing little about investing basics, I relied upon my gut instinct, suspecting that Fidelity might possibly provide a more suitable service. This hope alleviated the acute unease that I felt and I told the broker I would forgo opening an account. Later, after a short amount of research, I confirmed that the correct decision had been made. I discovered that investing with Fidelity would enable me to deposit my money directly into my account and manage solely the decisions and transactions of the account.

Having direct control over my future investments, with no middleman, was the best decision for me. I believe my intuition served me well. Looking back, I recall the broker suggested that I start my new account with an investment in a small airline company. The recommended company shut down in 2012. It is understandable that this is the risk one takes when investing but I preferred facing the risk solely on my own.