Transform Your Retirement With Consistent, Attainable Gains

Matthew Carr By Matthew Carr, Emerging Trends Strategist

Dividend Investing

Today, let’s talk about turning the unimpressive into the spectacular.

I’m going to go over a dividend strategy that’s a little different – that’s far more involved than a dividend reinvestment plan (DRIP). But it can yield impressive results.

We’re talking potential returns of 286% or more per year.

Every week, Wealthy Retirement publishes a list of the highest-yielding companies going ex-dividend for the week ahead. That means shareholders of record of those companies on that particular ex-dividend date are entitled to the announced dividend payment.

You don’t have to hold the companies long to receive the dividend… All you have to do is be a shareholder on the ex-dividend date.

Oftentimes, ex-dividend trading is regarded as being more effort than what it’s worth.

It’s usually tiny, bite-sized returns.

But there’s a secret to successful ex-dividend trading. Now, it does take a lot of work. It’s an expensive approach. And it’s a little more complicated than just simply investing in Perpetual Dividend Raisers…

But if you have the desire to stick with it – week in and week out – you can use it to create the retirement you want…

Turning $3,000 into $10,000 in Your Retirement

The secret to any dividend investing strategy is compounding.

And this is the same secret we’re going to use for trading ex-dividend. This is how you transform small – generally 1% to 3% gains each week – into big returns.

By doing it, you can turn $3,000 into $10,000 in a year.

Normally, to turn $3,000 into $10,000 in a single year, you’d need a 233% return on a single investment.

So, how does an ex-dividend trading strategy perform as well as one big hit like a 200%-plus gainer?

Exactly for the reasons it’s hated…

Using an ex-dividend trading strategy is often ignored or overlooked by a lot of investors because the gains are generally small.

Basically, all you’re doing is buying shares in a company three days before it goes ex-dividend – when shareholders on that date are entitled to a dividend payment – and then selling the shares the day of or the day after the ex-dividend date.

The goal is to capitalize on the small bump in share price as the company goes ex-dividend (which hopefully outpaces the price reduction in the shares because of the dividend payment), snagging the rights to the dividend that will be paid on the shares you own, and then exiting.

What this means is, your holding time of a particular company is extremely short – not years or months or weeks – but days.

It also means your transaction costs go up substantially. For a lot of investors, this is the biggest obstacle and downside.

And your return per trade is going to be nothing to write home about… Typically only a couple percentage points.

You can’t impress your friends by saying you earned 1% on a trade in a week.

But the secret to being successful using an ex-dividend strategy is compounding.

Think about this: If you start with a small sum – a mere $3,000 – you only need a 2.5% gain per week to transform that into $10,000 in a single year.

That’s far more attainable than hoping for a 200% homerun…

Bite-Sized Gains to Boost Your Returns

First off, trading ex-dividend isn’t going to be for everyone.

It’s a constant process and has a couple layers to it. And I can’t stress enough the expense.

But what I’m going to show you is how you can potentially turn $3,000 into $10,000 in a single year, using companies that we’ve listed here on Wealthy Retirement in our table of highest-yielding companies going ex-dividend.

And we’re just going to walk through eight trades – going back to when we first launched the ex-dividend table. Otherwise, this article would be the size of a book…

With this strategy, you’re looking to make around 104 trades per year (52 weeks, one buy and one sell per week). And that’s at an average transaction cost of $8.95, so that’s going to be $930.80 for just one year of trades

And there’s one thing we have to remember: Dividends aren’t paid on the day a company goes ex-dividend. The payable date is usually a couple weeks later.

So, what we’re going to do is take our $3,000 starting point and break it into two pieces.

One piece is our investing capital: $2,000.

The other piece is going to be our “bank:” $1,000.

The “bank” is to borrow against while we wait for our dividend payments to actually arrive in our accounts. Again, because dividends aren’t paid on the ex-dividend date – they’re paid at a later point. So, if we want to rollover our gains each week from our dividend capturing trades, we need a fund to “borrow” from.

But once we’re paid a dividend, it goes back into the “bank” to replenish the amount we borrowed.

It sounds complicated. But you’ll see how it works…

Below is a series of eight trades – an example of the power of an ex-dividend trading strategy since the beginning of August. These are all companies that were published in Wealthy Retirement’s ex-dividend table. We just selected one each week as the most tradable highest-yielders.

An Ex-Dividend Strategy At Work

We start off with $2,000. The first trade is DHT Holdings… The highest yielder of the week at 14.16%.

Company

Symbol

Date

Action

Price

Shares

Total

Dividends Owed

Payable Date

DHT Holdings

DHT

8/2/2012

Buy

$6.32

316

$1,997.12

DHT

8/7/2012

Ex-Div

$75.84

8/16/2012

DHT

8/8/2012

Sell

$6.395

316

$2,020.82

Portfolio Total

$2,096.66

Week % Return

4.98%

This did well. The $75.84 expected in dividends is borrowed from the $1,000 “bank”… That means there’s $924.16 in our “bank,” with the $75.84 loan we gave ourselves to be paid back on August 16, 2012.

You then take the $2,096.66 in capital and roll it into the next trade…

Company

Symbol

Date

Action

Avg. Price

Shares

Total

Dividend Owed

Payable Date

Diana Containerships

DCIX

8/8/2012

Buy

$6.185

338

$2,090.53

DCIX

8/14/2012

Ex-Div

$101.40

9/5/2012

DCIX

8/15/2012

Sell

$5.965

338

$2,016.17

Portfolio Total

$2,117.57

Week % Return

1.29%

The weekly gain wasn’t as impressive – a mere 1.29%. But we don’t need homeruns. Just small, consistent gains. And the same situation as above concerning the dividend… The $101.40 expected in dividends is borrowed from our “bank,” which now has $822.76 in it. And the total is folded over into the next trade…

Company

Symbol

Date

Action

Avg. Price

Shares

Total

Dividend Owed

Payable Date

Medley Capital Corp.

MCC

8/16/2012

Buy

$12.995

162

$2,105.19

MCC

8/22/2012

Ex-Div

$58.32

9/14/2012

MCC

8/23/2012

Sell

$12.79

162

$2,071.58

Portfolio Total

$2,129.90

Week % Return

1.17%

During this trade, the dividends were paid that were “borrowed” from the first trade in DHT – the $75.84. That brings the “bank” total up to $898.60 momentarily. The $58.32 gained from this trade is borrowed from the “bank,” bringing the balance down to $840.28.

Company

Symbol

Date

Action

Avg. Price

Shares

Total

Dividend Owed

Payable Date

Rimage Corporation

RIMG

8/24/2012

Buy

$6.905

308

$2,126.74

RIMG

8/29/2012

Ex-Div

$52.36

9/14/2012

RIMG

8/30/2012

Sell

$6.85

308

$2,109.80

Portfolio Total

$2,162.16

Week % Return

1.67%

Again, you see, the gains are generally very small.

Company

Symbol

Date

Action

Avg. Price

Shares

Total

Dividend Owed

Payable Date

PDL BioPharma

PDLI

8/30/2012

Buy

$7.34

294

$2,157.96

PDLI

9/5/2012

Ex-Div

$44.10

9/14/2012

PDLI

9/6/2012

Sell

$7.41

294

$2,178.54

Portfolio Total

$2,222.64

Week % Return

3.00%

During this trade,  the $101.40 in dividends is received from the DCIX trade… After “borrowing” the Rimage dividends, the “bank” balance is now $889.32.

Company

Symbol

Date

Action

Avg. Price

Shares

Total

Dividend Owed

Payable Date

Armour Residential Reality REIT

ARR

9/6/2012

Buy

$7.55

294

$2,221.97

ARR

9/12/2012

Ex-Div

$29.40

9/27/2012

ARR

9/13/2012

Sell

$7.51

294

$2,206.47

Portfolio Total

$2,235.87

Week % Return

0.63%

Again, the gains are small. This is exactly why investors who aren’t compounding their ex-dividend trades get frustrated…

Company

Symbol

Date

Action

Avg. Price

Shares

Total

Dividend Owed

Payable Date

H&E Equipment Services

HEES

9/14/2012

Buy

$18.88

118

$2,227.84

HEES

9/20/2012

Ex-Div

$826

9/19/2012

HEES

9/21/2012

Sell

$13.31

118

$1,570.58

Portfolio Total

$2,396.58

Week % Return

7.57%

This was a special dividend from H&E, that’s why the ex-dividend date is after the payable date. The dividends from the PDLI, RIMG and MCC trades all arrived on September 14. So the “bank” balance is now $970.60 – the only “outstanding loan” is the $29.40 from the ARR trade. It was an above average week. And the $826 from the HEES special dividend is folded over into the final trade in this example…

Company

Symbol

Date

Action

Avg. Price

Shares

Total

Dividend Owed

Payable Date

Great Northern Iron Ore Properties

GNI

9/21/2012

Buy

$80.72

29

$2,340.88

GNI

9/26/2012

Ex-Div

$101.50

10/31/2012

GNI

9/27/2012

Sell

$82.69

29

$2,2398.01

Portfolio Total

$2,499.51

Week % Return

6.77%

Look at that… In eight trades, we turned $2,000 into nearly $2,500, just by snagging gains other investors would dismiss.

Also, at this last trade, the “bank” balance would be $898.50… The only “outstanding loan” is the final trade in GNI.

The most important aspect is you can see the power of compounding these little gains each week. It starts to really add up. And the longer these trades are conducted, the greater the returns become.

Since August 2, 2012, if we’d done these trades as outlined, we would’ve collected and rolled over $1,292.42 in dividends in just these eight trades. And the total return on the original $2,000 investment would be 24.96%, with an average weekly return of 3.39%.

At that pace, there’s the potential to turn a starting investment of $2,000 into a little more than $11,321 in a year. That would equate to a 466% gain. And, as stated above, we’d spend more than $900 in trading costs throughout the year, which basically zeroes out the $1,000 “bank” that was set aside at the beginning of the strategy.

But even if you wanted to add in the projected $930.80 in expected trading costs for the year, the projected total gain at this pace would still be 286%. And this potential return would be accomplished without a homerun… Just consistent, bite-sized gains.

This type of strategy is undoubtedly more expensive than most – including taxes and trading costs. But taking small returns and rolling them over and over – compounding them each week – really adds up and can transform an investor’s retirement portfolio.