Analysis - Sell before or after Ex-Dividend Date?

For most dividend investors, investment returns are largely tied to the quarterly or semi-annual payout, where companies return their profits to shareholder. In this post, the common saying that it doesn't matter if one sells out before or after the dividend date will be investigated.

The Theory

When a company declares a dividend payout, a few important details will be released. This includes specifying the amount of money that will be distributed (known commonly as DPU), as well as an ex-dividend (XD) date. For example, if the following is declared:

DPU: 2 cents

Ex-dividend date: 2nd Jan 2021

An investor that has 100 shares by the end of 1st January will be entitled to 200 cents in dividends. A separate investor that only bought 100 shares on 2nd January will not be entitled to this dividend amount. 

In theory, 2nd Jan's opening price would drop by 2 cents compared to 1st Jan's closing price, as holding the shares on 1st Jan comes with a 2 cents dividend 'bonus', while holding it on 2nd Jan does not.

The Data

The aim of this post is to see if there's any potential strategy around maximizing gains from dividend payouts. To do so, historical prices as well as dividend records were downloaded from Yahoo Finance.

In total, data from 30 REITs/Biz-Trusts were selected, giving us 1049 dividend dates from 2010 to 2020. This translates to roughly 3.2 payouts per counter per year, which makes sense given that some counters have semi-annual payouts while others have a quarterly schedule.

List of counters included in analysis

Initial Assumptions

To find out whether it's generally better to hold a counter past the ex-dividend date, or to sell it prior, the following assumptions/setup was made.

1. On the day before ex-dividend, the investor buys at market close price.

2. On ex-dividend day, the investor either sells at market open, or market close.

3. No transaction costs factored in.

Results - Selling at Day Close

Given that the mean can be easily skewed by outliers, the counters are sorted by the median 'profit'. 

A profit value of 0 means that the counter was sold at a capital loss, that is compensated exactly by the dividend gain (eg. buy at $1.00, sell at $0.90, collect $0.10 dividend). A profit value of 0.5 means that the counter was sold at a small capital loss that was less than the dividend gain (eg. buy at $1.00, sell at $0.95, collect $0.10 dividend).

From this chart, the top 5 median performers either have too low sample counts to make any meaningful observation, or have significantly lower means dragged by outliers. SK6U at 6th place has quite a few samples (29), and have mean and medians of above 0.2.

Results - Selling at Day Open

 

From this chart, it is clear that selling at ex-dividend's market open yields better results than day close. No counters recorded any negative profits, and the profits are generally higher as well.

Over here, we see that counters like A7RU, CY6U and C38U have sufficient samples (more than 20) and have mean and median values comfortably above 0.2.

Conclusion

There is clearly a bias towards selling on ex-dividend day instead of before, be it at the start or the end of the day. Whether or not this bias can be applied to real world context would depend on a few factors.

1. Distribution yield

2. Quarterly vs Semi-annual Payout

3. Transaction costs

That aside, I think that the main takeaway here is that for most REIT counters, if an investor already has plans to exit the position, he/she might want to wait till ex-dividend date instead of selling right before the date.

Cheers,

InvestingNugget

Author's note:

Any mentions of companies above does not constitute a recommendation to buy or sell. Use the insights above at your own risk.