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Dividend investors seeking to optimize income from their investments should look at ex-dividend dates and time their purchases accordingly.
Timing the market is difficult. Timing to maximize income from dividends, however, is much simpler. Buying a stock before the ex-dividend date qualifies you for the next upcoming dividend payment, whereas foregoing the next ex-dividend date should, in theory, give you a better entry price point as the stock is expected to trade with a discount on the ex-dividend date.
Company Logo (Investor Relations)
Let’s now turn to the analysis. With such a reliable dividend payer and regarded by many as a pure income play, are we observing investors buying the stock in the run-up to the ex-dividend date? Are we observing people buying the stock after the ex-dividend date drop? Let’s find out as Hercules Capital’s (HTGC) next ex-dividend date on March 5 is looming around the corner.
Now, let’s get straight into the analysis itself!
To do so, I have analyzed how a $10,000 investment in Hercules Capital has fared so far on each of the ex-dividend dates over the last 12 years (48 observations in total) by comparing stock prices the day before the ex-dividend date, on the ex-dividend date, and the day after. This also factors in a tax rate of 15%.
The results for these 48 ex-dividend dates are tilted in favor of buying the stock NOT immediately before its ex-dividend date. Expressed in % of most beneficial outcomes (i.e., the strategy that yielded the highest return), it looks as follows:
- Buying the stock 1 day before ex-dividend date: 16 observations; 33.3%
- Buying the stock on the ex-dividend date: 10 observations; 20.8%
- Buying the stock 1 day after ex-dividend date: 22 observations; 45.8%
A moderate majority of 66.7% of outcomes favor not buying before the stock goes ex-dividend whereas 33.3% of outcomes benefit from buying the stock prior to its ex-dividend date.
I have run that type of analysis on other stocks in the past and for instance for stocks like AT&T (T) which also have a rich dividend history and have been a cornerstone of many dividend income portfolios, I was surprised that the results for Hercules Capital were far more balanced. In the case of AT&T my most recent analysis concluded that in at least 7 of 10 cases it was beneficial not to buy before the stock goes ex-dividend.
As far as peer analysis is concerned, I have run that analysis on Ares Capital (ARCC) recently and discovered a 58/42 overall ratio which did not deliver a clear message and is more comparable to a coin toss than to a seeking alpha strategy. So for Hercules Capital, a stronger case be made for waiting for its ex-dividend date and subsequently here are the detailed results of that first stage of the analysis.
Figure 1: Overview of occurrences of best outcomes by stock by year
Hercules Capital – Best Outcomes By Year (Designed by author)
In 6 of 12 years between 2011 and 2022, investors have fared better not buying the stock before the ex-dividend date. In the other 6 years, it is a tie.
Advancing the analysis
Next, I have calculated the actual price changes of the stock around the ex-dividend dates (you can interact with the dashboard) as follows:
- Change Day 1. (Opening price ex-dividend date) – (Closing price ex-dividend date -1)
- Change Day 2. (Opening price ex-dividend date +1) – (Closing price ex-dividend date)
- Total Change. Day 1 + Day 2
- Total Discount/Premium. Total Change – Dividend per share
This total change over the two days has been put in relation to the actual dividend payment, which serves as a proxy for how much the stock price would have been expected to drop if it were solely to reflect that change.
By putting that total discount/premium in relation to the actual dividend per share, we get something I have termed “discount/premium in dividends” which is depicted below for all the ex-dividend dates contained in the analysis.
Discount(-)/premium(+) in dividends: (Total Discount/Premium)/Dividend per share
A simple reading example for a recent ex-dividend date on August 8, 2022, reads as follows:
Hercules Capital – Discount vs Premium (Designed by author)
Around the 8/8/2022 ex-dividend date investors could pocket in a total discount of $-0.33 over the two days around the ex-dividend date. Expressed in terms of dividends this amounts around 0.66 dividends gained. Or put differently, the drop over the two days has been higher than the actual dividend. In this case, having bought the stock on the ex-dividend date + 1 would have led to a gain of an almost 2/3 additional dividend per share.
What’s more, while it is good to know what the best strategy is with Hercules Capital around ex-dividend dates, we also need to shed light on the size of the opportunity by looking at the total discount/premium in dividends across several ex-dividend dates and across many years.
In fact, disregarding commissions and taxes, investors could have gained additional dividends in 6 out of the last 12 years by forfeiting the dividend and buying the stock post its ex-dividend date.
Hercules Capital – Dividends Gained or Lost (Designed by Author)
Still, overall on an accumulated basis, the hypothetical investor that had purchased Hercules Capital on or after each ex-dividend date over the last 12 years could have earned an additional 2.98 in accumulated dividends.
To better understand this behavior, let’s create a tree-map, which is sized based on the “discount/premium in dividends” metric. This clearly shows when the best opportunities have occurred in the past. Similarly, it also shows when investors have lost dividends by waiting too long for the stock price to drop following the ex-dividend date.
Hercules Capital – Dividend Tree Map (Designed by author)
Again, the reading example helps understand what exactly is shown here.
Hercules Capital – Dividend Tree Map Reading Example (Designed by author)
I believe that this is a very powerful way of looking at the pricing action around ex-dividend dates for stocks.
I will extend this analysis to other high-yielding stocks in order to understand if we can observe similar patterns there or if they favor more enticing and one-sided strategies.
To keep track of upcoming ex-dividend dates, I use the Dividend Calendar Tool (make sure to follow instructions here). This handy dividend calendar view allows me to view the respective next ex-dividend dates. Here is a sample screenshot of how this looks like (showing expected dividend payments in January for my portfolio):
My Dividend Calendar (Designed by Author)
Investor takeaway
In summary, dividend investors who want quick income from their investments without having to sell anything could screen the market for ex-dividend dates and time their purchases accordingly. However, in the case of Hercules Capital, it makes more sense to forego the ex-dividend date and instead buy the stock on or after the ex-dividend date. Historically, this has produced moderately superior returns.
Although, as so often, results are subject to one’s own individual interpretation. It shows that, for Hercules Capital, solely relying on the stock price to decrease following the ex-dividend date would have been the best decision in the cases covered in this article.
Naturally, the “buy” or “not buy” decision should depend on far more factors than just the ex-dividend date, but it is one variable to consider when trying to optimize your income.
Nonetheless, the data is only fairly convincing in that case as the results are slightly tilted in favor of foregoing the ex-dividend date at best or fairly balanced if we are treating it conservatively. For Hercules Capital, I will follow and test that strategy around its ex-dividend date but also just the stock whenever I want and right now with the stock trading at a very attractive 10%+ yield after having substantially raised its dividend over the last two quarters and maintaining a very high supplemental cash distribution offers a great buying opportunity.
What do you think about Hercules Capital? Are you timing purchases in line with ex-dividend dates or not care at all about this?
Source link
Pgiam/iStock via Getty Images
Dividend investors seeking to optimize income from their investments should look at ex-dividend dates and time their purchases accordingly.
Timing the market is difficult. Timing to maximize income from dividends, however, is much simpler. Buying a stock before the ex-dividend date qualifies you for the next upcoming dividend payment, whereas foregoing the next ex-dividend date should, in theory, give you a better entry price point as the stock is expected to trade with a discount on the ex-dividend date.
Company Logo (Investor Relations)
Let’s now turn to the analysis. With such a reliable dividend payer and regarded by many as a pure income play, are we observing investors buying the stock in the run-up to the ex-dividend date? Are we observing people buying the stock after the ex-dividend date drop? Let’s find out as Hercules Capital’s (HTGC) next ex-dividend date on March 5 is looming around the corner.
Now, let’s get straight into the analysis itself!
To do so, I have analyzed how a $10,000 investment in Hercules Capital has fared so far on each of the ex-dividend dates over the last 12 years (48 observations in total) by comparing stock prices the day before the ex-dividend date, on the ex-dividend date, and the day after. This also factors in a tax rate of 15%.
The results for these 48 ex-dividend dates are tilted in favor of buying the stock NOT immediately before its ex-dividend date. Expressed in % of most beneficial outcomes (i.e., the strategy that yielded the highest return), it looks as follows:
- Buying the stock 1 day before ex-dividend date: 16 observations; 33.3%
- Buying the stock on the ex-dividend date: 10 observations; 20.8%
- Buying the stock 1 day after ex-dividend date: 22 observations; 45.8%
A moderate majority of 66.7% of outcomes favor not buying before the stock goes ex-dividend whereas 33.3% of outcomes benefit from buying the stock prior to its ex-dividend date.
I have run that type of analysis on other stocks in the past and for instance for stocks like AT&T (T) which also have a rich dividend history and have been a cornerstone of many dividend income portfolios, I was surprised that the results for Hercules Capital were far more balanced. In the case of AT&T my most recent analysis concluded that in at least 7 of 10 cases it was beneficial not to buy before the stock goes ex-dividend.
As far as peer analysis is concerned, I have run that analysis on Ares Capital (ARCC) recently and discovered a 58/42 overall ratio which did not deliver a clear message and is more comparable to a coin toss than to a seeking alpha strategy. So for Hercules Capital, a stronger case be made for waiting for its ex-dividend date and subsequently here are the detailed results of that first stage of the analysis.
Figure 1: Overview of occurrences of best outcomes by stock by year
Hercules Capital – Best Outcomes By Year (Designed by author)
In 6 of 12 years between 2011 and 2022, investors have fared better not buying the stock before the ex-dividend date. In the other 6 years, it is a tie.
Advancing the analysis
Next, I have calculated the actual price changes of the stock around the ex-dividend dates (you can interact with the dashboard) as follows:
- Change Day 1. (Opening price ex-dividend date) – (Closing price ex-dividend date -1)
- Change Day 2. (Opening price ex-dividend date +1) – (Closing price ex-dividend date)
- Total Change. Day 1 + Day 2
- Total Discount/Premium. Total Change – Dividend per share
This total change over the two days has been put in relation to the actual dividend payment, which serves as a proxy for how much the stock price would have been expected to drop if it were solely to reflect that change.
By putting that total discount/premium in relation to the actual dividend per share, we get something I have termed “discount/premium in dividends” which is depicted below for all the ex-dividend dates contained in the analysis.
Discount(-)/premium(+) in dividends: (Total Discount/Premium)/Dividend per share
A simple reading example for a recent ex-dividend date on August 8, 2022, reads as follows:
Hercules Capital – Discount vs Premium (Designed by author)
Around the 8/8/2022 ex-dividend date investors could pocket in a total discount of $-0.33 over the two days around the ex-dividend date. Expressed in terms of dividends this amounts around 0.66 dividends gained. Or put differently, the drop over the two days has been higher than the actual dividend. In this case, having bought the stock on the ex-dividend date + 1 would have led to a gain of an almost 2/3 additional dividend per share.
What’s more, while it is good to know what the best strategy is with Hercules Capital around ex-dividend dates, we also need to shed light on the size of the opportunity by looking at the total discount/premium in dividends across several ex-dividend dates and across many years.
In fact, disregarding commissions and taxes, investors could have gained additional dividends in 6 out of the last 12 years by forfeiting the dividend and buying the stock post its ex-dividend date.
Hercules Capital – Dividends Gained or Lost (Designed by Author)
Still, overall on an accumulated basis, the hypothetical investor that had purchased Hercules Capital on or after each ex-dividend date over the last 12 years could have earned an additional 2.98 in accumulated dividends.
To better understand this behavior, let’s create a tree-map, which is sized based on the “discount/premium in dividends” metric. This clearly shows when the best opportunities have occurred in the past. Similarly, it also shows when investors have lost dividends by waiting too long for the stock price to drop following the ex-dividend date.
Hercules Capital – Dividend Tree Map (Designed by author)
Again, the reading example helps understand what exactly is shown here.
Hercules Capital – Dividend Tree Map Reading Example (Designed by author)
I believe that this is a very powerful way of looking at the pricing action around ex-dividend dates for stocks.
I will extend this analysis to other high-yielding stocks in order to understand if we can observe similar patterns there or if they favor more enticing and one-sided strategies.
To keep track of upcoming ex-dividend dates, I use the Dividend Calendar Tool (make sure to follow instructions here). This handy dividend calendar view allows me to view the respective next ex-dividend dates. Here is a sample screenshot of how this looks like (showing expected dividend payments in January for my portfolio):
My Dividend Calendar (Designed by Author)
Investor takeaway
In summary, dividend investors who want quick income from their investments without having to sell anything could screen the market for ex-dividend dates and time their purchases accordingly. However, in the case of Hercules Capital, it makes more sense to forego the ex-dividend date and instead buy the stock on or after the ex-dividend date. Historically, this has produced moderately superior returns.
Although, as so often, results are subject to one’s own individual interpretation. It shows that, for Hercules Capital, solely relying on the stock price to decrease following the ex-dividend date would have been the best decision in the cases covered in this article.
Naturally, the “buy” or “not buy” decision should depend on far more factors than just the ex-dividend date, but it is one variable to consider when trying to optimize your income.
Nonetheless, the data is only fairly convincing in that case as the results are slightly tilted in favor of foregoing the ex-dividend date at best or fairly balanced if we are treating it conservatively. For Hercules Capital, I will follow and test that strategy around its ex-dividend date but also just the stock whenever I want and right now with the stock trading at a very attractive 10%+ yield after having substantially raised its dividend over the last two quarters and maintaining a very high supplemental cash distribution offers a great buying opportunity.
What do you think about Hercules Capital? Are you timing purchases in line with ex-dividend dates or not care at all about this?
Source link
