Here’s The Best Time To Buy These 2 High-Yield Dividend Stocks

| January 20, 2017 | 0 Comments

ex-dividendBuying the dips on these two stocks, like Tim Plaehn explains in this article, effectively boosts the yield he earns on his investment and makes sure he puts more cash in his pocket. With his intimate knowledge of share price swings, Tim knows exactly the right time to recommend these two stocks. 

When it comes to investing in the market, you can’t change human nature. You can count on investors as a group to be either greedy or fearful at the exact wrong times. While we can’t change human nature, observant investors can learn, watch and profit from it.

High-yield stock investors have a steady stream of opportunities to take advantage of the uninformed investors’ greed. When a dividend-paying stock is due to pay its next dividend, the ex-dividend date occurs a few days to a couple of weeks before the actual dividend payment. To receive the dividend, shares of the stock must be owned or purchased no later than the day before the ex-dividend market day.

A pending dividend payment is not certain until it is officially announced, which usually happens a few weeks to a month before the ex-dividend and payment dates. Greedy investors read about the dividend announcement and rush to buy shares of the high-yield stock before it goes ex-dividend.

Often there is enough buying demand to drive up the share price in the week or two before the ex-dividend date. When the market opens on the ex-dividend date, the share price will open lower at the previous day’s closing value minus the dividend amount.

Investors who own the stock from the day before will receive the dividend, so their investment value has not changed. Investors who buy on the ex-dividend date will not receive the pending dividend payment. After the ex-dividend day, buying demand for the stock declines and it is not uncommon to see the share price drop during the one to three weeks after the ex-dividend date.

To recap: The share price of a high-yield stock often climbs on investor demand in the days before the ex-dividend, the stock drops by the dividend amount on the ex-dividend, and then the share price without the extra demand continues to fall for a few weeks after the ex-dividend. Eventually –all other market conditions being equal– the share price recovers and starts the climb towards the next ex-dividend.

The magnitude of the price decline from the before ex-dividend peak to the post ex-dividend bottom can be quite extreme. To find recommendations for my 30 Day Dividends service, I track the quarter over quarter price swings for 10 high-yield stocks. I selected this group for their steady dividend payments, a high current yield, and share price histories that follow the above-described pattern around ex-dividend dates.

For these stocks, the average quarterly share price peak to bottom ranges from 9% to 15%. That’s right, these stocks average a double-digit decline from high to low every quarter! When you look at individual results, the swing doesn’t happen every single quarter, but a meaningful share price drop occurs during most ex-dividend to ex-dividend quarterly periods.

As you can see, greedy investors in their urge to earn that next dividend rush to buy at what are usually the highest share values for the quarter. Crafty dividend-focused investors (that’s us!) wait for a few weeks and pick up shares that might be 5%, 10% or even 15% cheaper than the prices paid right before the ex-dividend date.

All you give up by waiting a few weeks is one dividend payment of 2.5% to 3%. You will still earn all the following dividends going forward into time. To take advantage of these repeating share price swings, my recommendation is to build a high-yield portfolio with at least a handful of stocks. Then watch the share prices in the post ex-dividend weeks and be ready to add shares if the price drops significantly (3% to 6%) below the ex-dividend date share price.

Over time you will end up with stock holdings that yield several percentage points higher than if you had purchased along with the greed driven herd just before ex-dividend. Here are a couple of stocks that often follow the pattern:

Hercules Capital Inc.Hercules Capital Inc. (NYSE: HTGC) is a business development company (BDC) that currently yields 8.7%. The company has paid the same steady dividend since Fall 2013. The HTGC share price has declined on average by over 10% from the pre-ex-dividend high to the next share price bottom.

Blackstone Mortgage Trust Inc.Blackstone Mortgage Trust Inc. (NYSE: BXMT) is a commercial mortgage real estate investment trust (REIT). Since it reorganized its business operations in 2013, BXMT has paid a steady dividend with moderate increases along the way. The share price average decline from the pre-ex-dividend high has been 9%. BXMT currently yields 8.0%.

Stocks that have a high current yield and the potential for dividend growth are an integral part of my income investing strategy that I share in my newsletter, The Dividend Hunter.

Note: This article originally appeared at Investors Alley.

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Category: Dividend Basics

About the Author ()

Tim Plaehn is the lead investment research analyst for income and dividend investing at Investors Alley. He is the editor for The Dividend Hunter, an investment advisory delivering income investments with double digit growth in share price and dividend payments, and 30 Day Dividends, a specialty income service that takes advantage of opportunities for relatively fast, attractive profits around potential dividend payouts.

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