Dividend stocks are thought to be the sleepy corner of investments. Investors find a great stock with a good yield, buy that stock, hold it, and rake in the dividends. No doubt this strategy has been a winner for awhile, and has been a low risk way to profit from dividend stocks.
You may ask, “What does timing have to do with this process?” In normal times, maybe it doesn’t have much input, but when the market is gyrating like today’s markets, it pays a dividend stock investor to patiently wait for a pullback, and execute your buy orders. Additionally, there are a number of subtler techniques that can minimize your taxes.
Dividend Stocks: Waiting For the Pullback
Let’s take a specific example. You just got your tax refund on April 15, and have wisely decided to invest in a quality, dividend paying investment. Ultimately, after doing your research, you decide that you want to invest in AT&T (T). Not only does it pay a very high yield, you don’t currently have a telecom stock in your portfolio.
You look at the price, $32.02, and the annual indicated dividend, $2.04, and say that is amazing. I am going to get a 6.37% yield. That means that each quarter, you will get a return of roughly 1.6%… or roughly the equivalent of what a high yield saving account might offer . . . for the YEAR! So in one quarter, you get a better return than a savings account returns in a year. Let’s do this!
But wait! If you patiently hold onto your funds and wait for a market pullback, you can do even better. Finally, a couple of weeks later, the market hits turbulence, and AT&T drops a couple of dollars, now on May 7th, the stock has dropped to 30.53. Now you are getting a 6.68% yield. Patience, in this case, is a virtue.
So how would you know whether a stock is ripe for a pullback?
A cursory glance at AT&T’s stock price chart (below) answers that question. AT&T is not a particularly volatile stock, but it does have slow increases followed by a pullback. This pattern is clear on the chart, and each pullback represents your chance to increase yield.
A way to quickly determine a good dividend stock entry opportunity is to look at an overbought / oversold indicator. If a stock is overbought—hold off. When a stock dips into Oversold, grab it.
Another method is to examine dividend stocks that have taken a recent dip. If you like any of those stocks, that could drive a decision to load up.
Finally, one other tip: In the fourth quarter, it may be worth buying dividend stocks after the dividend has gone past the ex-dividend date. While you may miss the dividend for that quarter, you get the stock at a correspondingly lower price, AND you don’t have to pay tax on the dividend for a stock that you just bought. It is a small timing point, but it can save some taxes!