With many companies offering dividend yields of anything between 5% and 10% in many instances, it’s easy to see why so many investors are drawn to these high yielding stocks. However a common mistake that a lot of amateur investors make is that they think this is risk-free money. That’s sadly not the case, however.
The fact is that you cannot simply buy one of these high yielding stocks just before they go ex-dividend, and then sell them straight afterwards for a risk-free return. Unfortunately the share price takes this dividend into account, so on the ex-dividend date you can be sure that the price will inevitably fall by the same amount as the yield, ie 5% or whatever it may be.
You can still make money from these stocks, however. You can either forget about the short-term price movements and keep them as long-term investments, banking the generous dividend payouts every year, or you can look to profit from them on a short-term basis.
This is something that I like to do a lot. All you do is create a list of companies who have generous payouts in the next few months (preferably 4% or more), and then concentrate on finding bargains from within that list. The best way to do this is to use technical analysis. If you use oscillating indicators such as the CCI, RSI and stochastic indicators, for instance, it’s very easy to see which stocks are trading at bargain levels because each of them will be indicating an oversold position at the same time.
This is a low-risk trading strategy because there are two big reasons why one of these shares will rise in the near future. Firstly because they are obviously oversold on a technical basis, but secondly because there is a forthcoming dividend payout which nearly always brings in additional traders and investors and helps to drive the price higher.
So the point I want to get across is that its always worth drawing up a list of high-yielding stocks and paying particular attention to those that have big payouts coming up. It’s not a fool-proof strategy, just like any other trading method, but in most cases it will generate some excellent results.
Furthermore you will often find that you can bank your profits without hanging around for the dividend payout either. This is obviously beneficial because you can plough these profits back into the markets straight away without having to wait a few months for your dividend to be paid.
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