How to Make Money on Dividends: Real Cases

How to Make Money on Dividends: Real Cases

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We have already discussed making money on stocks at the IPO, as well as at the moment of falling in price. On the whole, there is nothing complicated in trying to make money on the growth of the stock price, just buy securities and hold them as long as possible. In this case, tech analysis is worth using in order to find the best entry opportunity with minimal risks.

However, on the example of the growth of Apple stocks, we can see a steep rise even after a swift decline. Let us recall that the stocks fell to $142 in January 2019, however, currently the price is testing $320. Thus, in just a year's time the price more than doubled, which is a perfect result.

Apple Inc stock price chart
Apple Inc stock price chart

Today, we shall discuss one more earning option at the stock market at the moment of dividend payment; here, there are also details, serious advantages and drawbacks.

What are dividends?

Fundamentally, dividends are a share in the company's profit. If we hold these papers, we have the right to receive a part of this profit divided among the stockholders by the company. It is also easy to become a stockholder: you just need to buy the stocks at the exchange and thus gain an opportunity to earn on dividends.

For example, Apple is paying dividends to its stockholders four times a year, i.e. every quarter. As a rule, the sum aimed for paying dividends makes 30% of the company's net profit. The latter is distributed in a week's time. Dividends amount for $0.77, so if we hold 10 Apple stocks, we will receive $7 as dividends. Sounds not bad, in a year's time the stock price has grown more than two times, and additionally, we could several times receive extra income as dividends.

Apple stocks price chart
Apple stocks price chart

However, not always has Apple been paying dividends to its stockholders. In 1995, it was decided to invest all the capital in business and the development of new products and services. Only in 2012 it was decided to start paying dividends again.

Dividend cut and the growth of the stocks

Information about the dividends on the stocks of a company can be found in the dividend calendar. The information about such payments normally becomes available after the stockholders' meeting: this might happen several months before the real payment of the part of the company's profit to its stockholders.

Dividend cut or the so-called registry closing day is the last day when the stockholder must hold the stocks to be able to be paid by the company.

There even exist strategies in which the trader buys stocks before the dividend cut day to receive additional income as quickly as possible. On the other hand, if the investor sold their stocks before the dividend cut day, even if they had been holding the stocks for several months. The number of traders that wish to make money on dividends without effort grow swiftly before the dividend cut day, which provokes growth of the stock price. However, after the distribution of the profit the stock price declines because the traders sell their stocks upon receiving the payment.

What happens to the dividends if the stocks fall?

It is worth remembering that these are two different things: trying to make money on the stock price fluctuations and on the dividends. If we bought 10 Apple stocks at the beginning of 2019 at the price of $145, now we can sell them at $318, earning $1730. However, to make this money, we need to make a sell operation at the exchange and only after that use the money. This way we make money on the stock price fluctuations: we buy cheap stocks and wait for a moment to sell them at a higher price.

Apple stocks price chart - dividends
Apple stocks price chart - dividends

As for receiving income from dividends, there is no need to constantly buy and sell stocks to make money. In fact, you have to do nothing; the company pays a part of its profit to a person who invests their money in the company. So, we do not need to sell the stocks; to receive dividends, we just need to buy and hold the stocks.

An opportunity to receive additional income by just holding some stocks in your portfolio pushed traders and investors to create various strategies aimed at maximizing possible income and minimizing risks.

Long-term buy of stocks

The simplest option is to just buy the stocks of a promising company or two and hold them as long as possible regardless of the fluctuations of the stock price. What is more, we do not care about the current stock price because few of us know what will happen to the company a couple of years later. For example, with Apple, we see the stock price double in just a year.

On the other hand, everything might seem quite simple, but not every investor is able to watch calmly the market fall: most likely, they will just escape the downtrend with losses. At the same time, experienced traders advise us to be ready for such losses.

For example, Warren Buffet says quite frequently that sometimes doing nothing might be much more profitable than the desire to buy and sell stocks. This way he pushed us to the idea that it is much better to spend time on studying the company and choosing promising stocks than to trade intraday without a system.

Of course, there are examples of strong intraday traders but most average market participants can receive income from passive investments of free funds in stocks. A serious drawback of the strategy is its being long-term, and the advantage is making a profit on future dividend payments.

Buying stocks before the dividend cut day

As we have mentioned above, when the dividend size becomes known after the stockholders’ meeting, the interest of traders to the stocks starts growing, hence, the securities go up thanks to strong buys. The closer the dividend cut day, the higher can the stock price rise.

Apple stocks price chart - gap
Apple stocks price chart - gap

The essence of the strategy is in buying the stocks before the cut, and not just a couple of days before but right after the stockholders’ meeting before the quotations move upwards too much. Thus, one has an opportunity to make money on dividend payments as well as on the growth of the stock price. It is important to remember that we are at the market, and not always the things will go according to our scenario, that is why the rules of money management are to be followed.

Buying stocks after dividend payment

As a rule, after the dividends are paid, the stock price falls for the size of the payment. Here, we can consider buying stocks, counting on further growth of the stock price. We are not expecting a quick income from dividends right now but wait for the next payment. However, a strong decline after a dividend cut allows to buy the stocks at a bit lower price than the previous one and later make a profit on the fluctuations.

Buying stocks after dividends - Gazprom
Buying stocks after dividends - Gazprom

It takes the stocks two to three months to recuperate, in rare cases, they return to their previous levels in a couple of weeks or even days. A big advantage of this strategy is an opportunity to see the stock price grow in the mid term.

It is curious that on the US stock market dividend payments may have little influence on stocks. With Apple, we do not see serious drawdowns on the price chart. Such moments occur but it can be said that during extended declines dividend payments just push the market even lower due to enforced pressure from the sellers.

Buying stocks after dividends - Lukoil
Buying stocks after dividends - Lukoil

On the other hand, at the Russian stock market, we can notice an obvious falling a couple of days before dividend payments in large companies. It seems that traders do not try to make money on the companies’ payments to their stockholders but calmly wait for the opportunity to buy right after the dividend cut at a low price, which can also be called a stock market strategy.

Summary

On the whole, there is nothing difficult in attempting to make money on dividends; you just need to hold the stocks before the dividend cut. On the other hand, depending on the market type, the stock price can seriously decline after this event, and traders must be ready to assume these risks. Anyway, before buying any stocks, it is necessary to study the chart behavior historically to assess the income from dividends.

It might be that buying stocks right after the dividend cut shows much more profitability in perspective than a banal attempt to buy securities a couple of days before the dividend payment. And the words of the market celebrities are worth remembering: buying stocks for a long term may be a better decision than buying and selling every day in a search for serious fluctuations.

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