Take it to the Max – Trading Dividends for Maximum Income
In an age of persistently low interest rates the search for income is on. In this article, Mark Riding explains how DividendMax can be used to identify expectable dividend values as a high yield alternative to savings and bonds and help to deliver predictable income from investments.
DividendMax is a tool that enables an investor to construct an investment portfolio based upon predictable levels of future dividend income.
It ranks the scale and timing of declared and predicted dividends, listing the ‘ex-dividend’ and ‘pay date’ of each thereby allowing the user to select stocks that deliver the returns they require at a level of risk they can tolerate.
The tool compares the yields of over 1100 stocks globally, ranking them by yield, with further filters by index and sector.
‘DividendMax is a tool that enables an investor to construct an investment portfolio based upon predictable levels of future dividend income’
The user can then refine their search by Market Capitalisation, Dividend Cover, Consecutive Annual Dividend Payments and Forecast Dividend Increase.
The core components of DividendMax are:
OptimizerMax (selector tool)
The Optimizer tool looks at the scale and timing of forecast dividends and continuously calculates and recalculates the expected yield according to the price of the stock and the proximity to the ex-dividend dates.
The user can select stocks according to the risk associated with the dividend payment being made and then apply filters according to a whole range of criteria until they are able to identify stocks that are right for their own attitude to risk and income requirement.
OptimizerMax (and all of the DividendMax tools) allow you to drill down into the individual company details which will give you fundamental data, future dividend data and the dividend history.
GeneratorMax (income planning)
The portfolio tool allows the user to select from all future dividend payments and create a portfolio that produces regular income according to their individual requirements. It calculates and displays the income per £1000 invested, provides portfolio performance metrics and keeps a transaction history.
CountdownMax (dividend capture)
The countdown tool provides a list of all companies with dividends going ex-dividend (the period during which a purchaser of a share would not qualify for an upcoming dividend) in the coming three months that can be adjusted by index or by sector.
CountdownMax shows the gross actual return on each dividend and the status of each dividend, whether an estimate or declared; it looks forward for a quarter and shows the type of dividend (Interim/Final/Quarterly/Special) and gives the yield of that particular dividend.
Because it takes account of dividends over time DividendMax is able to render the ex-dividend factor irrelevant.
The tool predicts dividends based upon a company’s stated dividend policy or clear future payment pattern; alternatively it takes an average of analysts’ forecasts.
Trading Strategy for the Income Investor.
The income investor will typically decide on a level of return they are happy to receive over a set period of time and DividendMax allows them to do this by identifying forward dividends and their timing.
It uses the concept of an ‘option trade’ that allows the investor to buy the stock and hold it for the appropriate period of time, safe in the knowledge that they are happy with the return. Should the targeted return come in sooner via a share price rise, the ‘option’ can be exercised thereby giving the investor the desired return early or the trade can be left to run further.
The following example demonstrates an ‘option trade’ in a stock that is high on the Optimizer, Admiral PLC, which has had an optimized yield of over 11% during the past twelve months and is currently 8.40%.
All figures are correct as of the time this example was constructed (20/10/14)
51.5p going ex-dividend on the 7th May 2015
52.4p going ex-dividend on the 10th September 2015
54.1p on the 5th May 2016
Admiral may be of interest to you as an income investor as it has a history of paying increased dividends over a sustained timeframe. Assuming that it continues to pay increased dividends, your capital should be relatively safe, other things being equal.
The Admiral share price is 1222p
You expect to receive in that time income of 51.5 + 52.4 + 54.1 = 158p
This represents a yield of 12.93% (158/1222)
To show an annualised figure the yield is multiplied by 365 and then divided by 562 which is the
number of days until the third dividend goes ex – i.e. 12.93 * 365 and divided by 562 to give 8.4%
An annual yield of 8.4% becomes the target return on an investment in Admiral which, if deemed acceptable, can be added to a portfolio.
To secure the option trade, Admiral would need to rise to 1324.6p at any time during the 365 days from the execution of the trade.
This figure would be adjusted according to any dividends that are paid in the period and the achievement of the ‘option trade’ quickly can lead to outstanding returns.
The creation of a portfolio of ‘option trades’ can represent a solid trading strategy for the income investor with risks and target returns set at the outset.
The prospective optimised yield is a constant variable because of fluctuations in the price of the share and the proximity to the ex-dividend date; DividendMax performs these calculations every day against 1100 companies and the calculations also work for preference shares.
Whilst many income investors choose to consider the next three dividends that are due, DividendMax allows the user to select other timescales looking both backwards and forwards.
DividendMax is not intended to encourage dividend stripping or dividend capture, it is designed to allow an income investor to set acceptable returns from income (dividends) and use this as a baseline for total return, which takes account of share price movements.
‘(Dividend Max) is designed to allow an income investor to set acceptable returns from income’
Current market conditions do not favour the ‘buy-and-hold’ strategies that delivered superior returns in the 80s and 90s and the pursuit of profit through unstructured active trading may concern the DIY investor, particularly when markets can be seen to be acting irrationally.
DividendMax delivers planning capability to the income investor based upon their individual circumstances and objectives. It is designed to allow those looking to employ a returns based strategy backed by the willingness to trade actively to seek out returns that out-perform the market.
‘Current market conditions do not favour the ‘buy-and-hold’ strategies that delivered superior returns in the 80s and 90s’
With all major indices in the UK being down on the year, the DIY investor may wish to consider adding DividendMax to their trading armoury because in current trading conditions, dividends and active trading are two of the only ways to eke a profit out of stock markets.
Click on the link below for a free 30 trial, compare and contrast the performance of some of the model portfolios that have created or set up your own dummy portfolio to see how structured income investing can add a dimension to your investment strategy.