Summer is approaching, the time for the closure of company registries for the right to receive dividends, the time for dividend cutoffs. In my opinion, this is the worst season. The rally of the “President’s cycle”, the rally of the “New Year”, the saying “Sell in May and go for a walk”, yes, that there … All of them together do not take away as much money from traders as they take away races provoked by dividend cutoffs.
Let’s agree on the shore, I love dividends, I am in favor of dividend strategies, for which stockists have been systematically and painstakingly collecting portfolios for years. I am against trying to get on a leaving train, against deals provoked by the approaching cutoff. Let’s take a look at the main mistakes stock traders make strategies based on dividend cutoffs so that you will not make them in the future.
Errors on dividend cutoffs
How about eating four times a year? What? Can’t you last? To me, speculators who build cut-off strategies are like those who plan to eat 1-4 times a year. If a company closes the dividend register 1-4 times a year, what is the chance that you will catch the right wave and not make a losing deal? Even if you are a very conservative person, you need to focus on trading signals that occur at least once every 20-25 a year. So that there was time to maneuver, there was data for research, so that by missing one or two signals or running into unprofitable ones, you have many chances to fight back.
I am often countered by “I trade dividends in the summer, and there is still a lot of news in the rest of the year.” If you want to make a profit, it is important that the strategy is comfortable… 90% of my clients have a strategy such that they can test its signals in the past. Is it possible to check the triggering of news on past quotes? It is very doubtful, because all the news is very heterogeneous, and besides, at the level of rumors, it is often imprinted in the DNA of quotes. For strategies whose trading signals cannot be verified in the past, we accept risks as 100%, and, most likely, they will be uncontrollable. Don’t believe me? Prove otherwise?
Let’s go back to the tactics of playing cutoffs. Many people believe that stocks are going up to the cutoffs. I have a feeling that on any day before the cutoff you will not meet a stock analyst, he will talk about it. Growth needs a reason, a fulcrum. As such, my assistant and I took a meeting of the Board of Directors at which the size of the dividend is recommended. We took a dozen of the most popular stocks, which people most often run after in the hope of dividends. So, in half of the cases, the shares rose, and in half they fell before the dividend cut-off. Straight clearly 50 to 50, and, by a similar amount of percent.
Well, okay, those who like to buy stocks, there are much fewer who like to build strategies in anticipation of a fall in stocks after cutoffs. Many traders have a holy belief that from the morning on the day after the cutoff, stocks open with a gap down by the size of the dividend. And they are trying to come up with something in this expectation. Let’s take a look at a summary table of popular Russian issuers, which will help us dispel all the myths associated with the behavior of securities after the cut.
- The first myth: the dividend gap is equal to the size of the dividend. Zero times was equal. Zero!
- The second myth: selling shares at the opening of trading after fatherly, you will definitely stay in the black when dividends come. And again no! Approximately every third time you will be in the red. And if you are unlucky and you buy shares at the peak of the cut-off day, then the chances of staying in positive territory generally fall to 50/50!
- The third myth: do not be afraid to buy stocks before the cut-off, even if you do not sell on the gap, you will still be in the black. I don’t even want to comment on this myth. If you accidentally bought securities at a price that turned out to be the peak of the cut-off day, then someday you may be in the black, but you will almost always see a minus in your account, even in blue chips it is three to four times the dividend. In practice, account rollbacks of 15-20% destroy the traders’ brains of even the most staunch long-term investors. Once you saw such a failure, the second … Will there be a third?
In the table below, there are hundreds of Russian recognizable issuers. To prepare the pivot table, I examined 16 parameters of the behavior of stocks before and after the cutoff in the entire history of each security presented on the Russian stock market. And this table is not perfect, it is a defense against the stupidity that people do in the market. Going into deeper research, you can build an interesting strategy for earning on dividends. But I almost don’t see people ready for this, it’s easier to follow the persuasion of analysts, and then get upset why my securities fell by 4 dividend sizes! Summary table 1. Comparison of the dividend gap and dividend and financial results when buying securities for the purpose of cut-off.
What are the analysts trying to persuade us to do?
As a public analyst, I unwittingly want to justify my colleagues and say that when they “advertise” dividends, they often write about long-term shareholding, in the context of which dividends are not a pleasant trifle, but an important part of the strategy. Clients simply do not hear about the fact that the strategy is proposed for a long term, clouded by the desire for profit. But this excuse will suit a few analysts and other stock gurus. The market is full of “cheats” that provoke you to deal for any reason. They are not always villains, sometimes they themselves believe in the myths that I have listed above. Honest analysts focused on the long term must understand and write out a hundred times not only their forecast, but also a risk declaration, and not formal, but with the basics of financial planning.
Wake up. Alas, in Russia no one has long-term money. You are just setting people up. Public long-term analytics is a universal evil. It can only be given personally to a client when you are 100% sure that his financial plan is really ready for long-term investment. It is better to give people the facts, and they will figure out themselves whether to get involved with dividend securities or not.
Finally, I will give you a table on the basis of which I am making summary data. If you do not have such tables, once again I ask you not to come to me to cry and complain about fate if you are again deceived by dividend papers. The key to the future is in the past! Very often, if you looked at the behavior of securities before the cutoffs in advance, you would not run into losses.
Table 2. What data you need to know the minimum in order to survive the dividend cut off with dignity. On the example of Raspadskaya shares.