DISCLAIMER Stocks and options trading have large potential rewards, but also large potential risk. You must be aware of the risks and be willing to accept them in order to invest in the stocks and options markets. Don t trade with money you can t afford to lose. This is neither a solicitation nor an offer to Buy/Sell stocks or options. No representation is being made that any account will or is likely to achieve profits or losses similar to those discussed in this report. The past performance of any trading system or methodology is not necessarily indicative of future results. All trades, patterns, charts, systems, etc., discussed in this report are for illustrative purposes only and not to be construed as specific advisory recommendations. Information contained in this correspondence is intended for informational purposes only and was obtained from sources believed to be reliable. Information is in no way guaranteed. No guarantee of any kind is implied or possible where projections of future conditions are attempted. Copyright by Profits Run, Inc. All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means, electronic, or mechanical, including photocopying, recording, or by any information storage and retrieval system. Published by: Profits Run, Inc. 28339 Beck Rd Unit F1 Wixom, MI 48393 www.profitsrun.com
Table of Contents Introduction... 3 What is "Dividend Skimming"... 4 Key timing rules for Dividend Skimming... 4 Dividend Skimming in action... 6 Drawbacks of Dividend Skimming... 7 Better (and safer) than Dividend Skimming?... 8 Bottom Line... 8 www.profitsrun.com 2
Introduction Buy low and sell high. That s what most people attempt to do when buying stocks. But that s easier said than done. For every Apple or Facebook, there are thousands of companies that went belly up along the way. That s why many investors choose to stick with established companies. Not only are established companies less likely to go belly up, most solid companies also pay some kind of a dividend to shareholders. A dividend is simply a distribution of a portion of the company s earnings to the company shareholders. Most companies pay quarterly dividends, which is to say they issue a dividend payment to their shareholders four times a year. There are exceptions to this rule, of course. But for the most part, it holds true. In fact, at the time of this writing 19 of the 20 most widely held stocks that distribute dividends do so on a quarterly schedule. (The lone exception at the time of this writing is Roche (symbol: ROG) which pays a dividend on an annual basis.) Dividends payments are an attractive form of income for all different kinds of investors because the payments occur on a fairly predictable basis. For example if you own shares of Apple stock (symbol: AAPL) then it s relatively easy to find out when the next dividend payment will occur. And a quick online search will reveal the history of dividend payments. So it s fairly simple to venture an estimate as to when the next dividend payment will occur, and how big it will be. There s no guarantees of course as all dividend decisions ultimately depend on the ruling of the company s board of directors. But because it s possible to predict when a company will pay a dividend, and because it s possible to estimate roughly how large that dividend payment will be, some investors attempt to exploit dividend timing rules using a practice sometimes referred to as dividend skimming. www.profitsrun.com 3
What is Dividend Skimming? Dividend skimming is an alternative label for what s also known the dividend capture theory. Dividend capture is an investment strategy based on the practice of buying stocks with the intention of collecting the dividend payment, and then selling the stock shortly after collecting the dividend rather than holding the stock long term. The purpose of the trades is to simply collect the dividend payment, as opposed to the idea of buying the stock low and selling high. Dividend skimming is a little-known strategy commonly used by corporations because of the limited tax liability on dividend income of other corporations. Many financial advisors recommend against the practice of dividend skimming for individual investors because depending the on the size of your account the commissions and tax liabilities may overshadow the potential benefits of such a strategy. So naturally you should check with your tax professional and financial advisor before attempting this strategy. However, even if you never use this strategy, simply understanding how it works (and how some corporations use this strategy) will make you a savvier investor. Key Timing Rules For Dividend Skimming Timing is crucially important for dividend skimming. Buy a day too late or sell a day too early and all your gains are lost. So understanding the timing rules on dividends is of vital importance. Here are the key dates that you need to be aware of: The Declaration Date: On this date, the company will declare that they are paying a dividend. They will file the appropriate paper work and will typically issue a press release announcing the amount of the dividend and the date payable. The Ex Date or Ex-Dividend Date: This date typically occurs two business days before the record date. On and after the ex-dividend date, the stock trades ex or without the dividend payment. In other words, you must own shares of stock BEFORE the ex-dividend date in order to be eligible for the dividend payment announced on the declaration date. We ll go over a timing example later in this report. www.profitsrun.com 4
The Record Date: This is the date the company counts up all the shareholders to determine who is eligible for a dividend distribution during this time period. This date occurs two business days after the ex-dividend date. This is because it often takes two days for a stock transaction to officially be marked as settled within your account. Take the following example: Let s assume Apple declares a dividend of $1 per share payable on October 30 th to shareholders of record as of October 10 th. The record date is therefore October 10th and the ex-dividend date would be set at two business day before the record date, or October 8 th. If John wants to capture this $1 dividend, he needs to buy the stock BEFORE the exdividend date of October 8 th. If he buys on October 7 th, his trade will settle on or before October 10 th and he will then be counted as shareholder of record as of October 10 th and will therefore receive the dividend. But if he delays a day and purchases on the ex-dividend date 8 th, the trade may not officially settle by October 10 th (especially if non-trading days happen to fall during this period) and John could miss the dividend payment. The Payable Date: This is the date the company will actually pay the dividend payment to shareholders of record. Inexperienced investors chasing dividend payments will often make the mistake of ignoring everything but the payable date, mistakenly thinking as long as they purchase the shares before the payable date that they ll receive the dividend payment. This is incorrect. www.profitsrun.com 5
Dividend Skimming In Action Here is one possible strategy for capturing dividend payments without needing to hold the stock for more than a few days. In theory, prior to the ex-date the price of the stock should accurately reflect the expected dividend. As an example, if AAPL is trading at $100 per share and announces a dividend payment of $1 per share, the price of the stock should rise to $101 per share. After the ex-date, purchases of the stock are no longer eligible for the dividend payment so the share price should in theory fall by the amount of the dividend payment. In our example, AAPL should fall by $1 per share on ex-dividend date. Notice the intentional usage of the words in theory. Because of price action, the expected price movements don t always happen like many inexperience investors would expect. And this opens a window of opportunity for dividend skimming. Step 1: Identify ideal stock candidates for dividend skimming. What makes a stock ideal for dividend skimming will vary by individual because certain stocks will carry a share price that is too high for one investor while other stocks prices will pay a dividend amount that some investors will deem unworthy. So there are no hard & fast rules in this area, but consider the following suggestions: - Focus on stocks with a medium-yield dividend in the neighborhood of 3%. This allows you to potentially capture a modest dividend payment on modestly priced stocks, whereas stocks with higher dividend yields will often carry premium price tags. - Focus on stocks with plenty of trading volume as you ll need the necessary liquidity to ensure you can enter and exit your position quickly. www.profitsrun.com 6
Step 2: Once you ve identified a stock for use with the dividend skimming strategy, and once the declaration date has already occurred (so you know if and when the stock will be paying a dividend and how much it will be), purchase shares of the stock BEFORE the ex-dividend date. Step 3: Monitor the stock price on the ex-dividend date and if the stock price does not fall as expected, sell the shares of stock. For example, if AAPL is trading at $100 per share on the day before the ex-dividend date and the announced dividend is $1 per share, the stock price should fall to $99.00 on the ex-dividend date. However, if you purchased the shares at $100 before the ex-dividend date and the stock only falls to $99.50 on the ex-dividend date, you can sell the shares on the exdividend date and you will still receive the $1 per share dividend payment on the payable date. This is essentially a return of $0.50 per share in just a few days. If this situation does NOT occur, simply hold the shares until the stock rebounds to $100 or higher and you will have captured both the dividend and perhaps a capital gain as well. Drawback of Dividend Skimming The three major drawback of the dividend skimming strategy are as follows. First, because you ll likely be holding the stock for fewer than 60 days, you ll likely pay a higher tax rate on any gains captured using the dividend skimming strategy. Of course, this may not be a concern if you re using this strategy within certain tax-deferred retirement accounts such as an IRA but you should absolutely check with your tax advisory before attempting to implement this strategy. Second, because of transaction costs this strategy may not make sense for many individual investors. And finally there is always the chance the stock would drop in price dramatically after purchase and an investor may find themselves stuck holding the stock longer than planned or being forced to sell at a loss if the stock shows no signs of recovery. For that reason, use this strategy only after checking with your tax and financial professionals. www.profitsrun.com 7
Bottom Line There are a nearly limitless number of strategies for going after returns in the market. But the only thing that matters is finding a strategy that works for you and your unique investment goals. Never try to use a strategy that doesn t align with your aspirations as an investor. Better Than Dividends? How To Go After 292% Bigger Gains With This information page reveals a timetested method for going after 292% bigger gains compared to the income you stand to gain from collecting dividends. This Unusual Strategy However, there is a catch. This method can only be used during certain times of the year and the next profit opportunity is coming up soon. This free video explains how you can start using this simple investing technique TONIGHT VIDEO: How To Go After 292% Bigger Gains Thanks To A Predictable Event That Happens 4x Per Year Good Trading, Bill Poulos Profits Run, Inc. www.profitsrun.com 8