Debunking the myth of going ex-dividend

Business Times - 01 Aug 2011
By MICHELLE TAN

THE earnings season is well underway and some investors may be smiling ahead of the upcoming National Day holiday as companies start to declare dividends.

Already, some dividend announcements have been made by certain real estate investment trusts (Reits) and it could be an opportune time for investors to come in and take a bite off the season's 'monetary offerings'.

However, investors do have to take note of the stock's ex-dividend date, as going in on, or after, that date would leave one no richer than when starting off, as that date marks the final cut-off to buy the stock in order to be entitled to the season's payout.

But remembering the date is probably the easy part with the advent of mobile calendars that offer timely reminders to even the most forgetful.

The bigger dilemma that continues to cloud the minds of investors time and again is none other than the decision of whether to buy a stock just before it goes ex-dividend, especially after finding out the period's dividend is surprisingly 'enticing'.

So why is this seemingly simple decision so mind-boggling for many?

Common sense tells investors that buying a stock just before it goes ex-dividend would be a preposterous idea as the dividend declared for the period would already be priced into the counter's open-market trading value once it is declared.

But does common sense always depict what happens in reality? Perhaps not.

In an attempt to shed some light on the notion that dividends are typically priced into a stock's price before it goes ex-dividend, we took a basket of Reits that commit to quarterly payouts and plotted their net positions on each constituent's respective ex-dividend dates across each quarter since 2006.

Taking the closing price of the stock on the ex-dividend date, minus the price on the day prior, before adding back the declared dividend for the period, it was found that the majority of the basket tended to yield positive net positions on their ex-dividend dates for the past five years, debunking the myth behind the 'fateful' day.

In fact, at least half of the Reit basket closed in a positive net position for approximately 76 per cent of all the quarters since 2006.

As such, it might not always hold true that one would be at the losing end if he invests in dividend counters after the period's 'token' has been declared.

Having said that, the conclusion was arrived at assuming all the companies in the basket did not announce any material event that could trigger an upsurge or dip in share price.

But nonetheless, the findings should warrant some thought.

Instead of planting funds into a dividend stock waiting for the respective payouts each season, one could invest his money elsewhere and still take a position in the counter at the eleventh hour and stand a chance to grab a piece of the cake along with other loyal shareholders that have been clinging on to the counter over the long term, thus losing out in terms of opportunity cost.

As such, it seems that one could potentially have his cake and eat it too after all.