Thursday, September 8, 2011

What is the Dividend 15 split, and how does it work? Pt.2

Yesterday, I was looking at the basic stocks that compose the 'dividend 15' fund.

Today, I'll look at how the fund is able to generate such a high-yield.

The dividend split is yielding over 10%. In most cases (and maybe even in this case) this should send alarm bells off. Such a high dividend yield means that the organization paying this yield is forking over 10% of it's market value every year.

By giving away so much, they have less and less available to invest in the organization.

Jack, I'm looking that these companies (all the banks especially). They only provide 3-5% dividends. How does the 'dividend 15 split' yield over 10%?

I am not the fund manager for the dividend 15, so I can't tell you for sure, but there is a good chance that they are doing some active trading of these stocks behind the scenes.

You see, in order to qualify for a dividend, you simply have to own the stock before the ex-dividend date. Think of it as a sort of 'dividend deadline'. If you own it after that, then you don't 'qualify' for upcoming dividend.

I have a strong suspicion that the dividend 15 is actually speculating the dividends of these stocks. Another thing that tipped me off was the fact that they say right on the website "Shares held within the Portfolio are expected to range between 4-8% in weight but may vary from time to time."

This means that they are usually going to have money in these stocks, but really, they may not have any, and they don't have to tell you when or why they are buying or selling. Mega alarm-bells in my head go off.

Let me show you how they may do it, step-by-step.

1) D15 (Dividend 15) watches the ex-dividend dates for a strong dividend stock like BNS (Bank of Nova Scotia).
2) They invest a large amount at the last minute of the ex-dividend date for the upcoming dividend.
3) They collect the dividend, and immediately sell.
4) Notice that since BNS is such a large stock, it's dividend devaluation is minimal, so they don't lose much in the 'dividend smash and grab'.
5) They repeat this process with another companies' ex-dividend date and dividend.

Jack! You've hit a gold-mine! I'm going to speculate dividend stocks too!

Hold on there - This strategy only works if you have a big ol' heap of money, like $10,000+.

How do I know it's only good for the big guys? Easy. I worked out the numbers.

Tomorrow, I'll look at one of the ways I believe the 'Dividend 15' makes it high yields - through a little 'dividend smash and grab'!

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