Dividend yield is an important factor for many investors when selecting stocks. For swing traders, who typically hold stocks for a short period (from several days up to a few weeks), the ex-dividend date can be a crucial event. So how does this date affect a swing trading strategy, especially if you plan to hold a stock for about a month?
What is the Ex-Dividend Date?
The ex-dividend date is the day by which an investor must own the stock to be entitled to receive the upcoming dividend payment. If you buy the stock after this date, you will not receive the dividend. Typically, the stock price drops by approximately the dividend amount after this date, because new buyers no longer get the dividend.
How Does the Ex-Dividend Date Affect Swing Trading?
1. Price Drop After the Ex-Dividend Date
The stock price usually decreases roughly by the value of the dividend paid. For a swing trader holding the stock during the ex-dividend date, this means that although they receive the dividend, the stock price may temporarily decline.
2. Dividend Yield as an Additional Profit
Holding the stock through the ex-dividend date means you get the dividend, which can increase the total return of the trade. If the dividend is sufficiently high, it can improve swing trade performance.
3. Increased Volatility
The period around the ex-dividend date often brings higher volatility, as some traders aim to “capture” the dividend, while others avoid holding the stock through the ex-dividend date. This can create both opportunities and risks.
How to Incorporate This into Your Swing Strategy?
- Plan Your Holding Period: If you intend to hold a stock for about a month and the ex-dividend date falls within this period, factor in the expected price drop due to the dividend in your plan.
- Use the Dividend: If the dividend represents attractive additional income, it may be worthwhile to hold the stock through the ex-dividend date despite the possible short-term price drop.
- Consider Volatility: Be prepared for increased volatility and set appropriate stop losses to limit potential losses.
- Review Dividend History: Some stocks pay dividends regularly and reliably, while others are irregular, which can impact your holding strategy.
Summary
The ex-dividend date can significantly impact swing trading. It offers extra profit potential through dividends but also brings the risk of price drops and increased volatility. Successful swing trading requires planning around this date and effective risk management.
