Ex-Dividend Date Buying
This brings up an interesting timing strategy that even value investors can employ. For example, if a company has declared a dividend of $2.20 per share, every 100 shares earns $220 per year or $55 per quarter.
Why wait three months before earning your first dividend when you could earn two quarterly dividends in the same time period? This doubles your dividend income in the first three months, just by being aware of the ex-date.
Key PointTiming purchase with ex-dividend date in mind increases dividend income in the fi rst quarter the position is owned.
A related strategy is to reinvest dividends in the purchase of additional shares, which creates a compound return rather than a simple return based on dividend yield. Most brokerage accounts allow you to make this election at the time you purchase shares.
In all market strategies, you will also want to establish clear policies and goals for buying as well as for selling shares of stock. The basic goal of buying should be based on a complete analysis of a company's fundamentals (see Fundamental Analysis). If you wait for a price dip to buy shares, you are likely to get a short-term bounce on the price, which is a good start to a long-term hold.
It is equally important to know when to sell. Long-term buy-and-hold does not mean keeping a stock in your portfolio no matter what. Value investors need to continually monitor a company to ensure that it continues to meet the criteria for a value investment. As soon as a company's fundamental strength or profitability change, it is likely that stock prices will begin to decline. Recognizing the changes as soon as they begin gives you the chance to sell shares and find a new, stronger candidate. By monitoring the fundamental trends, you will be able to spot a reversal or leveling out of those trends, and to decide right away whether to continue holding or to sell.
Key PointKnowing when to buy is an important skill. However, it is equally important to know when to sell.
Fundamental Analysis examines some of the more important fundamental indicators you need to track.
By Michael C. Thomsett