Author Topic: Question about dividends  (Read 2245 times)

mustache you a question

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Question about dividends
« on: May 01, 2017, 09:59:04 AM »
Costco recently announced a 7 dollar dividend to be paid out in May.  I was thinking of buying a bunch of shares from my rollover IRA account before the ex date to receive this dividend and then sell the shares to get back in my index funds.  Is this a smart strategy?

dandarc

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Re: Question about dividends
« Reply #1 on: May 01, 2017, 10:01:22 AM »
Only a good idea if you want to own Costco for a brief time.

The stock price will fall by the amount of the dividend once it goes ex-dividend, so this isn't going to magically make you any money.

Proud Foot

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Re: Question about dividends
« Reply #2 on: May 03, 2017, 02:11:30 PM »
It's not worth it now.  The stock price jumped from $172 to $178 when the special dividend was announced.  It's currently trading around $180.  The stock price will drop once the ex-dividend date hits.  Add in any trading costs and you will most likely lose money unless you are going to hold it for a longer period.

ChpBstrd

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Re: Question about dividends
« Reply #3 on: May 03, 2017, 03:44:13 PM »
The current price of COST is $180, up from about $173 before the announcement. If you think the price will drop by $7 following the dividend, as it logically should, back to $173, you should consider buying a put.

The June 2 puts with a $180 strike have an asking price of $3.70 per share as of this moment. If COST drops to $173, those options will be worth $7 per share on June 2, an 89% return in 29 days.

Oh, and it's actually $7 plus the $0.5 regular dividend.

How is this possible in an efficient market?

dandarc

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Re: Question about dividends
« Reply #4 on: May 03, 2017, 04:21:17 PM »
The current price of COST is $180, up from about $173 before the announcement. If you think the price will drop by $7 following the dividend, as it logically should, back to $173, you should consider buying a put.

The June 2 puts with a $180 strike have an asking price of $3.70 per share as of this moment. If COST drops to $173, those options will be worth $7 per share on June 2, an 89% return in 29 days.

Oh, and it's actually $7 plus the $0.5 regular dividend.

How is this possible in an efficient market?
Maybe the market is expecting the cost to rise further before the ex-dividend date.

ChpBstrd

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Re: Question about dividends
« Reply #5 on: May 04, 2017, 09:34:13 PM »
The current price of COST is $180, up from about $173 before the announcement. If you think the price will drop by $7 following the dividend, as it logically should, back to $173, you should consider buying a put.

The June 2 puts with a $180 strike have an asking price of $3.70 per share as of this moment. If COST drops to $173, those options will be worth $7 per share on June 2, an 89% return in 29 days.

Oh, and it's actually $7 plus the $0.5 regular dividend.

How is this possible in an efficient market?

I found the answer to my own question. The strike price of options is adjusted for special dividends. So the $180 strike in your account will become a $173 strike. Weird shit. With that in mind, the puts seem more attractive to sell than to buy - 2% premium on cash in 30 days. Perhaps the volatility caused by the announcement has affected the price equation in an unadjusted way.

ChpBstrd

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Re: Question about dividends
« Reply #6 on: May 05, 2017, 07:57:33 PM »
One other thing...

I looked into this dividend and it seems like it is being paid for with cash raised through debt.  They are essentially borrowing the money, and then turning around and paying it out as a cash dividend.  Ordinarily, I like to see debt used to finance long term capital assets or in some cases a shrewd acquisition.  And I like to see dividends to be paid out of earnings, and in the case of special dividends paid from from one-time realization events such as sale of a subsidiary or other non-current asset.

That's not what is happening here.  Management is essentially saying: we can raise money against our future earnings, so we should.  But then they are signaling that they cannot find any profitable areas of investment within the firm, through acquisitions, or buy-backs. So they are returning the cash to shareholders.  I'm not sure I follow the business reason for doing this. Unless you do and are satisfied with the reasons for management to do this, it is probably a good idea not to speculate in the stock.

^ THIS is why I'm not a dividend investor (except in REITs and MLPs). Most of these "dividend aristocrats" paying 3 and 4% yields and getting everybody excited are borrowing those dividends at 6%. And some CEO gets paid eight figures to keep the investors happy this way. They don't even realize the company is essentially a reverse mortgage.

Before you buy a dividend stock, check the bonds and the balance sheet.