A Crazy Crazy Idea

I do mean crazy. But exploring nutty ideas can help in the process of assembling a very sane strategy.

I read an article about the Alpine Dynamic Dividend Fund (ADVDX). The fund was created out of the changes in tax laws that made dividends more favorable. In a nutshell the fund will buy a stock in such a way as to capture the quarterly dividend, keep it long enough to get the favorable tax treatment and then sell the stock to do the same thing with another name. I am way over simplifying what they do but there is a good article in Kiplinger's if you want to pay for it (BTW Kiplinger's actually charges per article, could be a topic for another post) that explains in much more detail.

The fund has done very well but it has been the right time for dividend paying stocks (top down look). The question is how well can it do when growth is clearly in favor, maybe it will do great then too but that is the obstacle it will face.

If you use the link above to go to the fund's website you will see a couple of interesting things. First is in the top holdings section, the three largest holdings listed are all oil shipping stocks, comprising 7.27% of the fund. I like the idea of the shipping stocks very much. I own one for clients and wrote about another one for Motley Fool, I'm a fan. But these stocks are hot potatoes. And while the holdings listed may be out of date and all three names may be out of the fund there were all there together at one point. The manager is clearly willing to make some big bets. She may be very good at that, but big bets nonetheless.

Many years ago I had an idea similar to what this fund does and did nothing with it. To be clear I am not taking credit for anything and for all I know tons of people may have had the same idea before me and not done anything with it either.

As I lay this out, I am not thinking about the taxes or most of the other obstacles that exist. I'm just brainstorming here.

US companies pay dividends quarterly. In a simplified approach if you bought one stock that paid on the Jan-April-July-Oct cycle, another stock that paid on the Feb-May-Aug-Nov cycle and a third stock that paid on the Mar-June-Sep-Dec cycle you would triple the yield (assuming all three have the same yield).

To get a stock's dividend you have to have bought it before the ex-date and still have it on the ex-date. When a stock goes ex-dividend the price of the stock is reduced by the amount of the dividend. If a stock that pays a $0.25 dividend closed the day before the ex-date at $20.00, assuming everything else remains the same it would open the next day at $19.75.

Anyone undertaking this dividend trading idea would, at a minimum, want to hold the stock long enough to make the dividend reduction back. So keeping with the same example if the stock is bought at $20, held through ex-date and not sold until it gets back to at least $20 (maybe a little higher to make back the commission too). I suppose it would be possible to weave together a system where positions are closed and new ones opened every week (assuming the dividend gets recaptured that quickly). That would involve a lot of trading and several types of risk.

Another, less intense tactic would be to find three good stocks, that are on different dividend cycles in each of the S&P sectors, that usually pay dividends (maybe that means financials, industrials, energy, telecom, materials and utilities) and hold each one for the quarter.

A further twist would be to sprinkle in some foreign stocks that pay dividend once or twice year. Of course by paying larger dividends less frequently it would be more difficult to make back that ex-dividend reduction. Stick with the $20.00 stock from earlier. Making back $1 would probably take a lot longer than $0.25, probably.

This type of idea has all sorts of flaws but it is still interesting, even if only academically. Maybe I will pursue some sort of paper trade service to try it out. Feel free to comment about this one but since I am only brainstorming, please keep the insults to a minimum