Trader shouldn’t hold stocks for dividend. Moreover, investors should think twice before holding stock for dividend. Because dividend affects the stock price negatively.
How does hold stocks for dividend impact on price?
Most of the cases, dividend impacts on price negatively. But, negative impact of price may sustain for short time or long time.
If you are a long-term investor, you can hold stocks for dividend if your stock is fundamentally strong.
Otherwise, you should not hold stock for dividend. On the contrary, traders should avoid dividend return in order to protect trading capital.
Let’s share an example.
Suppose, market value of Apple’s share is $165 and it has declared dividend at $0.22 per share. Do you think Apple’s stock market price will remain similar after record date?
Answer is No. Because investors want to sell shares after record date. So, price will fall after record date. As a day trader or swing trader, you should not buy Apple’s stock before ex-dividend date.
How much will market price fall? You can’t predict. If you want to calculate return on dividend, you can calculate dividend yield to figure out actual return. Generally, stock price falls more than actual dividend yield.
Why does trading capital matter for traders?
Both for day traders and swing traders, trading capital is the main factor. If a trader fails to save his capital, he will go out from market. So, by any chance, you should preserve trading capital.
Dangerous outcome for holding stock to get dividend
A real Example
I hold a company’s stock for dividend. Because, it had high dividend yield. I bought per share at 23. Before record date, per share value was at 21. As per share valued declined by 2, I decided to take dividend.
After record date, per share value was at 19. I bought some more shares to average the price and I got some shares as dividend. Hence, per share cost was at 21. But present market value is 17.80.
I didn’t follow the golden rule of stop loss because of huge loss. Later, I have been waiting. Day after day, price is continuously falling.
Today’s closing price of per share was 17.80. I have been waiting to recover just my cost price for nearly 1 month. But the situation is worsening day after day.
Let’s calculate my profit loss percentage.
Dividend per share was 1. And 5% stock dividend was 5 shares for 100 shares. If I calculate 5 shares’ price at 18 per share, total earning as stock dividend is 90.
Per share gain is 0.9 (90/100). Per share earnings is 1.9(1+0.9). Dividend Yield is 9% (1.90/21)*100. On the contrary, my present loss is 15.24% (3.2/21)*100.
Net loss percentage is 6.24% (15.24%-9%). This loss may continue. Stop loss rule applicable for utmost 5% loss. But my loss is nearly 7%.
The main problem is I have confined my cash in a single stock. I can’t take new opportunity. If you confine capital for more than a month in a loss trade, how will you take new trade?
You may ask, why did I hold stocks for dividend?
Because of learning. I wanted to know the actual impact of dividend. As I am a trader and an investor at the same time, I like to apply new strategies to know the actual outcome. You also try to apply new strategy to figure out the actual result.
Why do I forbid you not to hold stocks for dividend?
In the above example, you can learn about the result. I analyzed both fundamentally strong and weak stock to know the actual dividend impact. From my analysis, traders should not hold stock for dividend.
But long-term investors can hold stock for dividend. Investors and traders desire are totally different from each other. Before holding, you should analyze the dividend yield.
Positive result of holding stocks for dividend
In order to get the positive result, you should hold highly dividend paid strong fundamental stock. Strong fundamental stock has equal chance of getting dividend and capital gain.
But you have to know how to buy stock for long term investment. If you can buy fundamental stock near 52 weeks lowest price, you can get both dividend and capital gain.
Trading strategies to avoid dividend impact
Naturally, traders have no intention for dividend gain. Traders’ actual intention to get realized gain. So, they try to avoid dividend effect.
I like to share my experience to you through my writing. I my not correct in some cases. So, you should take decision based on your learning and experience.
As a financial writer, I believe that all the tips are not applicable to all. Experienced traders and investors have his own strategies. If you learn from others, your knowledge will increase.