It is possible for an investor to make a quick short-term profit by investing in a dividend paying stock right before the company declares a dividend. By timing a stock purchase to coincide with the ex dividend date, an investor can own a high-yielding stock for as little as a week, benefit from the dividend and then sell the stock back on the open market. If sufficient shares are purchased and the brokerage fees are low enough then this technique can lead to significant profit with minimal risk.
Step #1 – Open an Account
For this technique to work, costs must be minimized which will require opening and using a discount brokerage account. Deposit as much money as possible into the account since the number of shares purchased will be directly related to how much is received when dividends are paid by a company.
Step #2 – Find a Dividend Stock
Many online brokerage firms offer sophisticated tools for investors to locate various types of investment opportunities. Using a stock selector, narrow your search for stocks which offer a dividend yield of between 5% and 10%. The higher the percentage the more is paid out as a dividend relative to the stock price.
Step #3 – Time the Dividend Date
After you’ve located a few stocks with high dividend yields, look for information regarding the ex-dividend date. This is an important step because you want to time your stock purchase and sale to be just before and just after the dividend declaration date. Most if not all stocks pay their dividends on a quarterly basis which means every three months or four times a year.
Step #4 – Buy Stock Shares
Using your newly created discount brokerage account, purchase an even number of shares, like 100 or 500 share lots, in your selected dividend stock. Once again, double check the dividend date to time your purchase correctly. If you purchase shares too late you will not be a shareholder of record when the dividend is declared. Normally, shares will need to be purchased roughly one business week prior to the ex dividend date.
Step #5 – Calculate the Gain
Purchasing even lots of shares is not mandatory but it makes it easier when calculating gains and losses and dividend yields. If you purchase 1000 shares of a stock at $10 a share and the dividend is 5% then that means $.50 will be paid for every share owned. Once the dividend is is paid out you will make $500 minus the brokerage commissions for purchasing and selling the stock. If the commission is $10 per transaction then that would be a net profit of $480.
Step #6 – Realize a Profit
To finalize receiving an investment dividend on a short-term stock purchase, sell the stock shortly after the ex dividend date. This example assumes that the stock in question was bought and sold for the exact same price. In a perfect world, all stock transactions would go smoothly but more than likely the sale price will be different than what you paid. And that is the inherent risk of using this technique to realize a dividend on short-term stock purchases. Every investment has risk and investors make mistakes so it is possible to purchase a stock for $10 a share and the following day bad news is announced and the stock drops to $6 a share. Instead of making a $480 profit you could lose $3,520. If however, the transaction works as planned you can use this technique multiple times and profit from short-term stock ownership and dividend payments.