Dividend Trading / Scalping / Stripping

[aeu97137]

This thread will record my experiment to see if it is possible to profit from short term trading of shares to capture the dividends. This is also known as dividend stripping, dividend scalping or dividend capture.

My trading approach is to buy shares late in the trading session prior to them going ex-dividend, then sell them early in trading on the next day, trying to benefit from the fact that I will receive the dividend and the well-known fact the share prices often do not reduce by the full value of the dividend after going dividend.

I am doing this via spread betting account in order to minimise the impact of trading costs and my aim to increase my account by 2% per week. I've taken 4 trades in my first couple of weeks which have all been positive and this has given me the confidence to set up this thread.

I will post more info on how I select possible trades in future post but feel free to share any relevant experience in this area or post any questions you may have.

Thanks,
JH.

 

[barjon]

This thread will record my experiment to see if it is possible to profit from short term trading of shares to capture the dividends. This is also known as dividend stripping, dividend scalping or dividend capture.

My trading approach is to buy shares late in the trading session prior to them going ex-dividend, then sell them early in trading on the next day, trying to benefit from the fact that I will receive the dividend and the well-known fact the share prices often do not reduce by the full value of the dividend after going dividend.

I am doing this via spread betting account in order to minimise the impact of trading costs and my aim to increase my account by 2% per week. I've taken 4 trades in my first couple of weeks which have all been positive and this has given me the confidence to set up this thread.

I will post more info on how I select possible trades in future post but feel free to share any relevant experience in this area or post any questions you may have.

Thanks,
JH.

I think you've probably been lucky so far.

If you read the small print you'll find that your SB company only credit your account with 80% of the dividend (some give more) whilst reducing the price by the full 100% amount.

 

[Sonicscooter]

So i understand your idea, you wish to pick up the difference if the share price doesn't fall by the amount of the dividend payment, but you have the spread to cover, plus the general market direction and the fact your holding a short term position over night so your subject to news events which you cannot react to.

Sorry but not for me, but good luck.............

 

[Sonicscooter]

Evening Barjon, i didn't know that, but it's not my line of trading, the concept seems like one i don't fancy.

 

[12WBT]

This was done with some of the top ten stock 's in the XJO index.
Also done on a broker account and not a bookmaker account
Back in 2008/09(bear market) I was shorting stocks before they went ex div.
Paying the div and the drop was bigger than the div paid.

With the current bull market you can buy before they go ex-div and now come back to the price within 1 to 2 days. Do your homework with the companies you are doing it with and should work okay.
i.e looks for stock's with an upward trend, broker recs and reports that the market likes.

Good luck with it.
12

 

[NVP]

good luck .............everything is worth a try in this game .......if you dont try you dont learn

N

 

[Jack o'Clubs]

As Barjon points out, the main reason this seems to be 'free money' but doesn't work in practice is dividend withholding taxes - you are never credited with the full dividend.

There's been plenty of academic research on it: this is probably the seminal paper.

http://pages.stern.nyu.edu/~eelton/papers/70-feb.pdf

To save you ploughing through it, it basically says that the stock price will fall by the amount for which the typical investor will be indifferent between the stock trading cum- and ex- dividend because of the tax differentials, even if the fundamental value of the company is lower ex-div.

 

[timsk]

As Barjon points out, the main reason this seems to be 'free money' but doesn't work in practice is dividend withholding taxes - you are never credited with the full dividend.

I know Jo'C knows his stuff - as does barjon - so I'm not going to question them - let alone contradict them. (I know, I'm a wimp!) However, what the OP suggests strikes me as being an interesting departing point for a trade. As a means of filtering stocks, it sounds as good as any to me. If s/he is then able to apply some additional TA (or whatever), backed by sound risk management, then s/he might have something, no?

What I'm really trying to say is that what s/he proposes may not be a robust stand alone strategy. By the same token, if he removes this element and just trades the residue of the strat' - then that too may not be viable. But, combining the two may provide him/her with an edge. The whole is greater than the sum of its parts . . .
Tim.

 

[tar]

aeu97137

SB companies pay 80% of the dividend , Spreadex pays 90% i think , and its clear that you've ignored the bid-ask spread , slippage ( especially at the open ) , overnight gap risk and rollovers = No free lunch .

 

[Jack o'Clubs]

What I'm really trying to say is that what s/he proposes may not be a robust stand alone strategy. By the same token, if he removes this element and just trades the residue of the strat' - then that too may not be viable. But, combining the two may provide him/her with an edge. The whole is greater than the sum of its parts . . .
Tim.

With respect Tim, combining two unviable strategies I think is more likely to result in one really bad strategy than a modestly winning one.

Dividend arbitrage teams at the IBs have some very clever people with very big computers syphoning off pennies (albeit millions of them) on the small discrepencies that arise from ex-dates: the chance of a retail punter managing to make anything from this consistently given the costs they have to bear is, frankly, zero. This is a typical 'in front of a steamroller' strategy where someone thinks they've found the holy grail because they have a series of small wins, before getting wiped out by the inevitable big loss.

 

[timsk]

With respect Tim, combining two unviable strategies I think is more likely to result in one really bad strategy than a modestly winning one. . .

Hi Jo'C,
Ah, apologies, I don't think I've made myself clear. What I was trying to say was that if you take a single strategy that comprises two (or more) distinct elements that complement one another, each of which may not be viable on their own but, when combined together, provide the trader with an edge. That's slightly different from having two separate and unviable strategies that, when combined, the trader hopes will magically turn into a viable one. Two negatives don't make a positive etc. I agree with you completely about that.

Regarding your broader point about dividend arbitrage, I don't doubt that you're right. What concerns me though is that your comments could be extrapolated and applied to just about any strategy one reads on a retail forum such as this one. Perhaps I'm reading too much into what you said but, for the reasons you've given, do you think all retail traders (not just the OP of this thread) are on a hiding to nothing? That's regardless of the market and methodology they trade?
Tim.

 

[tar]

Where would you put your SL in this ?

 

[Jack o'Clubs]

Perhaps I'm reading too much into what you said but, for the reasons you've given, do you think all retail traders (not just the OP of this thread) are on a hiding to nothing? That's regardless of the market and methodology they trade?
Tim.

No, retail traders can certainly win - but where they are on a hiding to nothing is on any arbitrage type strategy (such as this), which will have been bled dry by professionals using infinitely quicker technologies and infinitely smaller spreads/costs. Retail punters can do okay as long as they're not trying to take on the IB/pros at their own game - either ride the coat-tails or travel in uncharted waters.

 

[aeu97137]

Thanks for everyone's comments - many interesting and valid points.

I am using an account with IG who pay 90% of the dividend and do not adjust your underlying position. The rationale behind buying just before the ex-div and closing the trade as soon as possible after the ex-div adjustment is in order to minimise the risk of wider market movements during the holding period.

I suspect I am having a good run due to it being a bullish market, I am not convinced my trades would be as successful on strong down days or in a bearish market.

In terms of my first few trades:

1. Buy PRU 25/03 @ 1330, £1/point. Sell 26/03 @ 1324 = -£6.60. Div: £23.84. Net +£17.24
2. Buy RSL 02/04 @ 303, £4/point. Sell 03/04 @ 292 = -£42.76. Div: £56.36. Net +£13.60
3. Buy PSON 02/04 @ 1044, £1/point. Sell 03/04 @ 1017 = £-27.00 Div: £32.00. Net +£5.00
4. Buy AV. 02/04 @ 493, £3/point. Sell 03/04 @ 487 = £18.24 Div: £28.20. Net +£9.96

Position sizing is based on aiming for approx. 1% of bank for each pt movement in each share price.

I'll do another post soon about possible trade opportunities coming up this week.

JH.

 

[Sonicscooter]

Hi, just because i said it wasn't for me, doesn't mean i think you shouldn't look into it, we all do trading differently, you may work on this and find it's your "thing" even if others including myself think that the odds are against it. I'm sure others may look at my style and not be able to do it, i feel alot of what's involved intrading is down to personality as much as anything else.

Regards Shane.

 

[aeu97137]

For trade opportunities I look for FTSE350 companies going ex-div paying a dividend >2%.

Large, liquid shares offer maximum opportunity for price fluctuations during the ex-div day which increases the chances of closing the trade for a profit.

Opportunities can be identified from upcomingdividends .co .uk

Targets for this week:

SL. 2.70%
GRG 2.58%
ESUR 4.85%