One way that you can earn very high returns is utilizing a technique called 'buying dividends'. Buying dividends is the process of buying a stock just before it goes ex-dividend and selling it shortly after the ex-dividend date at the same [or at a higher] price as the cost price. The ex-dividend date is the date after which a buyer of the stock is no longer entitled to the dividend. In other words, if an investor purchases a stock on or after the ex-dividend date, the investor will not receive the dividend; however, if the stock is purchased prior to the ex-dividend date, the investor will receive the dividend on what is called the payment date. Another way to look at it is an investor can sell a stock on the ex-div date or later and still get the dividend.
Does it work? Let me give you an example. Last month, I bought United Online Inc. (UNTD) for 10.89 per share on April 11 and sold it on May 12, the ex-dividend date, for 11.56 per share, a return of over 6% before commission and before adding in the dividend, but that's really not relevant. The stock pays a dividend of 20 cents per share, which provided a return of 1.8% over 30 days. Annualized, it worked out to about 22%. [Full disclosure: author still owns UNTD in a retirement account.]
But I need not have tied up my money for a month. I could have bought the stock for 11.31 [closing price] on Friday, May 9, and sold it Monday, May 12, for 11.91 [closing price]. The gain on the stock was 60 cents, plus the 20 cent dividend is a return of 80 cents or 7% over a period of three days [before commission]. The annualized return is ridiculously high at 860%. But even if you broke even on the purchase and sale price, just the return on the dividend provided a 215% annualized return.
Generally, stocks are supposed to drop by the amount of the dividend on the ex-dividend date, similar to mutual funds, which always drop by the dividend amount. But in strong markets, the price of the stock can hold its value. This technique works often in bull markets, sometimes in flat or choppy markets, but for bear markets? Forget it. Sometimes you can sell the stock on the ex-dividend date, sometimes you have to hold the stock for a few days, and sometimes you have to hold the stock for a few weeks in order to sell the stock at what you paid or higher. In other words, this technique doesn't always work. But if it is a stock worth holding for the long term, what do you have to lose?
If you just want to buy a stock for the long term, look for the best ones that pay quarterly or provide monthly dividends. But if you are looking for a quick return in a short period of time, you might want to try buying dividends. The following are seven stocks with relatively low P/E ratios, low PEG ratios, high yields, and are going ex-dividend next week.
Genesis Lease Limited ( GLS ) ex-div date: 5/19/2008 yield: 11.75% P/E: 15 PEG: 1.38 Dividend: 0.47
Partner Communications Company Ltd ( PTNR ) ex-div date: 5/23/2008 yield: 6.20% P/E: 12 PEG: 1.76 Dividend: 0.35
Advanta Corp. ( ADVNB ) ex-div date: 5/21/2008 yield: 8.90% P/E: 6 PEG: 0.51 Dividend: 0.2125
Advance America, Cash Advance Centers ( AEA ) ex-div date: 5/22/2008 yield: 5.90% P/E: 14 PEG: 1.17 Dividend: 0.125
Journal Communications, Inc. ( JRN ) ex-div date: 5/22/2008 yield: 5.41% P/E: 10 PEG: 1.42 Dividend: 0.08
Community Capital Corporation ( CPBK ) ex-div date: 5/21/2008 yield: 4.46% P/E: 10 PEG: 0.99 Dividend: 0.15
Carnival Corporation ( CCL ) ex-div date: 5/21/2008 yield: 3.76% P/E: 14 PEG: 0.96 Dividend: 0.4
By the way, the stocks that pay semi-annual dividends pay dividend payments that are on average higher than the payments made on quarterly paying stocks, so it may we worth taking a closer look at dividend buying with those stocks.
Author owns UNTD.
By Fred Fuld at Stockerblog.com