How to Trade on Dividends

If you're one of the many investors or traders out there trying to figure out the direction of the stock market on a day-by-day basis, don't bother. It seems these days that (in most cases) it doesn't even matter what economic news is released. Regardless if the news is good, bad or just flat, the markets don't always follow in the same fashion.

When the economy is struggling and unemployment is up with no end in sight, how can an average trader make money in the stock market? There are many different strategies that you can use to work in your favor. Here's one that I've use time and time again (and have been quite successful too).

Dividends are a great way to increase your portfolio. I keep an eye on stocks that pay out dividends to their shareholders periodically throughout the year. Look for companies that two weeks away from their dividend ex-date. If you own shares of a company on that day (doesn't matter if you've owned them for one day or one year), you will receive a dividend payout. Dividends are calculated by percentage.

Remember to use the two weeks to research the company to see if their on the right track. If you notice that a company's dividend percentage is high (10%+), It's most likely because their stock price has dropped recently. If the percentage gets too high (20%+), a company will most likely lower the dividend payout (if not suspend it). After the ex-date has past, you can selling off your position (unless it a solid company). So make sure you do your research to prevent getting caught in the red.

Take into consideration that you must calculate your buy and sell price prior to buying any shares. If the stock price is $18.00 per share and the dividend is $1.50, that would make the percentage 8.3%. The way I like to look at it is that my price per share after dividend payout would be $16.50, so if I sell the shares at the same price I bought them for, I'm still ahead $1.50 per share. Any time you can make an 8% gain on any trade, you're doing good.

Don't get me wrong though, I've seen it where a stock price will drop more than 10% or better in after hour trading on the ex-date. Leaving the average trader having to wait until the next day to get out. Many mutual funds play the dividend game so beware if you're looking to trade on dividends.

To learn more about dividends and stock trading information, please check other articles in this category. Also, investing in a good stock market guide will answer a lot of your basic questions.

Joanne writes about a variety of topics including investing, adoption and technology.