The stock market is one of the higher-yielding investments an investor can make. But of course, it also has one of the highest risks.
But what if there was a safer way to make quick money from the stock market? Don’t worry, this isn’t a scam (though I guess scammers would say that) and I’m not asking for your money (that part, at least they probably won’t say).
There’s actually a sometimes-overlooked-and-always-boring way to make money off of stocks: dividends.
And the reason that is so is quite apparent. A lot of dividend pay outs are lower than what you could get in a time deposit – or even a high-yield savings account. Why would you tie your money up in volatile stocks you get 0.5 or 1% per annum?
Sure some stocks can yield as much as 4 to 6% (and happen to be blue chips), but is that enough to suffer through the volatility? Not really. So why bother?
Well, because you don’t have to tie your money up and suffer through the volatility.
Because stocks are so fluid – they can potentially change hands several times in a day – there’s just one date that the company takes note of who owns their stocks (the ex-div date). As long as you own stocks on the ex-div date, dividends will be paid out to you. It doesn’t matter if you didn’t own any the day before and sold it the very next day.
And that’s the essence of dividend hunting – chase the sure thing and make money in one day (though you’d have to wait a month before the money gets to you).
So how do you do it?
1. You can check the official Philippine Stock Exchange website (under Listings & disclosures -> Dividends/Rights). This is a list of dividends that have been declared by the companies.
2. Look for a stock that has declared a cash dividend. Divide the dividend over the current share price, and make sure the yield is at least 3% – the bigger the yield, the better. (dividend/shareprice=yield).
3. You need at least a 3% yield to make a profit as the fees and taxes for buying and selling can be as high as 1 to 1.5% of the whole transaction.
4. Look for stock dividends as well. It’s not cash, but since they’ll give you additional common shares, you can sell those in the stock market. They’re almost as good as cash.
5. Avoid preferred shares, property dividends, and any other dividends that are not cash or stocks. These aren’t bad dividends, and in some cases investing in preferred shares is a good investment. But these aren’t as easy to sell or liquidate as common shares. So you can’t make quick money out of them, making them incompatible with this strategy.
6. Take not of the ex-div date. Be sure to buy the day before this date, hold it until the stock market closes in the ex-div date. (If ex-div date is May 28, buy it on May 27 and hold it until the stock market closes on May 28.)
7. Do some due diligence. The last thing we want is to buy a stock, and then see it drop enormously in value. But since this is short-term trading (of blue-chip and/or dividend paying companies) there is very little fluctuation. We only need to do some basic chart pattern checking. Stock chart patterns are widely available in the internet. Just make sure the stock is not in a bear pattern. Hold off buying until you’ve checked.
Here are some pros and cons of this strategy to help you decide if it can work for you.
• Takes some of the volatility out of stock trading.
• Easier to pick stocks. PSE provides a list of who declared dividends, with ample time to buy.
• Profit is mostly guaranteed. Instead of timing your entry and exit, it’s more like earning interest. Though movement in share prices might make the profit a slightly less or more than what you expected.
• Quick profit. No need to lock your money and hold on to the stock for more than 2 days.
• Very repeatable. Dividend paying stocks tend to pay them regularly so you can keep using this strategy indefinitely with minimal research and effort.
• Share prices can rise right before the ex-div date and drop right after. It’s not always the case, and blue chippers don’t rise and drop too much, but it can happen.
• You typically need to wait around one month for the dividend to be paid out.
• Profits aren’t huge (for single transactions).
• It’s not something you can do at any time. You’ll have to wait for a stock with a high enough dividend (3% or more) before it makes sense.
Hopefully this article can help you be profitable in stock trading.
Carlos is the author of The Personal Finance Apprentice, a blog focused on using financial literacy to build a better future. He invests in dividend-paying stocks, index funds, as a way to grow capital for a future business and as a source of passive income.
This post sent by Carlos, personal finance apprentice