Market timing between two stocks...worth it or is this asking for trouble?

[Andre1969]

I recently sold off all my holdings in GGN (Gabelli Gold Fund or whatever they call it these days) to harvest a loss on my income taxes. I threw the proceeds in to AGNC, a REIT, as they're about to pay out a dividend. I already have some holdings in AGNC. I had planned on selling that off as well to harvest a loss this year, but then it came back up just enough that I figured it wasn't worth it.

But, it got me thinking. Right now, AGNC pays 65 cents per quarter, which comes out to around 13%. GGN pays 9 cents per month, which comes out to about 12.2%. However, if I was to hold onto AGNC just long enough to get the dividend, sell it and put it into GGN, but then swap back the next time AGNC's dividend comes around, for the year I'd end up at about 21.1% in dividends.

I would get all four of AGNC's dividend payouts for the year, plus eight of GGN's twelve payments.

Of course, there is risk associated with this strategy. For one thing, both funds have been trending downward in price, and cutting their dividends. And if I end up having to sell one too low and buy the other too high, that will throw things off. And then there's taxes associated with short term capital gains, and sales commissions. And it's going to make things more complicated come tax time.

Anyway, I have thought about trying this, just to see how it plays out. And I'd do it with a small enough amount of money that it wouldn't sink me if I lost it all. Anybody thoughts? Good idea to experiment with, or asking for trouble?

 

[haha]

I recently sold off all my holdings in GGN (Gabelli Gold Fund or whatever they call it these days) to harvest a loss on my income taxes. I threw the proceeds in to AGNC, a REIT, as they're about to pay out a dividend. I already have some holdings in AGNC. I had planned on selling that off as well to harvest a loss this year, but then it came back up just enough that I figured it wasn't worth it.

But, it got me thinking. Right now, AGNC pays 65 cents per quarter, which comes out to around 13%. GGN pays 9 cents per month, which comes out to about 12.2%. However, if I was to hold onto AGNC just long enough to get the dividend, sell it and put it into GGN, but then swap back the next time AGNC's dividend comes around, for the year I'd end up at about 21.1% in dividends.

I would get all four of AGNC's dividend payouts for the year, plus eight of GGN's twelve payments.

Of course, there is risk associated with this strategy. For one thing, both funds have been trending downward in price, and cutting their dividends. And if I end up having to sell one too low and buy the other too high, that will throw things off. And then there's taxes associated with short term capital gains, and sales commissions. And it's going to make things more complicated come tax time.

Anyway, I have thought about trying this, just to see how it plays out. And I'd do it with a small enough amount of money that it wouldn't sink me if I lost it all. Anybody thoughts? Good idea to experiment with, or asking for trouble?

Isn't AGNC a mortgage REIT? These have very particular characteristics including leverage that one must understand to be successful messing around with them.

Also, I don't have the facts, but it seems very likely that the Gabelli Gold Fund is doing a supported dividend, where what you are getting as a dividend includes a big slug of your own capital. Gold can't be legitimately throwing off that kind of dividend this year. Also, Gabelli is famous ( or notorious) for this ploy.

Ha
.

 

[karluk]

Stock trading strategies designed to capture dividends are certainly not new, so in that sense your idea deserves consideration. I am dubious that you will be able to manage the trades to avoid losing all of your extra dividend income to trading costs, higher taxes and badly timed trades, but it's your money and you at least have the right attitude of risking only a small amount of money and being willing to lose it all.

I once contributed to a financial message board where one of the other participants swore that he could time his purchases of RGR to capture the dividend and get out with a profit. He was very willing to share his strategy with others, but I found his explanations so confusing that I never did figure out whether he was actually making a profit or not.

 

[GrayHare]

High dividend stocks tend to drop in price immediately after their payout. So, yes, at dividend payment day you get your 5% or 10%, but the next day the stock opens at a price that is 5% or 10% lower. The end result is no gain for you, except, now you owe taxes on the dividend so you actually have a net loss.

 

[NW-Bound]

High dividend stocks tend to drop in price immediately after their payout. So, yes, at dividend payment day you get your 5% or 10%, but the next day the stock opens at a price that is 5% or 10% lower. The end result is no gain for you, except, now you owe taxes on the dividend so you actually have a net loss.

+1

Even stocks paying bitty dividends also drop in price when they go ex-dividend. It is just that the drop may be low compared to the daily fluctuation of the market and buried in the noise, but it's always there.

 

[Andre1969]

Yeah, that stock drop after they go ex-dividend is something I've thought about, as well. With GGN, it tends to simply get buried in the fluctuations, since it's only about 1% per month. With AGNC, it's more noticeable, but AGNC would usually (but not always) bounce back fairly quickly.

If I was to try this experiment, if either stock didn't bounce back fairly quickly after the ex-date, I'd hold off on swapping.

I have a feeling that realistically, it'll be more trouble than it's worth, but figured I'd at least bounce the idea off of you guys and gals.

 

[karluk]

Yeah, that stock drop after they go ex-dividend is something I've thought about, as well. With GGN, it tends to simply get buried in the fluctuations, since it's only about 1% per month. With AGNC, it's more noticeable, but AGNC would usually (but not always) bounce back fairly quickly.

If I was to try this experiment, if either stock didn't bounce back fairly quickly after the ex-date, I'd hold off on swapping.

I have a feeling that realistically, it'll be more trouble than it's worth, but figured I'd at least bounce the idea off of you guys and gals.

It's more complicated than simply monitoring whether the stock you currently own has bounced back from the dividend related drop. You also have to monitor whether the other stock is currently a good value or not. Even if you successfully capture the dividend and sell at the same price you bought, the other stock may have gone up by 10% or 20% since you sold. If you buy it back now at the higher price, you have lost money compared with a simple buy and hold of both stocks.

You would have to do something such as monitor the long term relationship between the price of GGN vs. the price of AGNC, adjusted for splits. When the ratio is low, you should sell AGNC an buy GGN. When the ratio is high, you should do the opposite. You are hoping that the ratio stays fairly constant over time, and that you will eventually have a chance to buy back at a favorable ratio. There is, of course, no guarantee that this will happen. You may never have a chance to repurchase a stock at a favorable price ratio, in which case you are likely to get stuck holding the stock that is performing poorly for an extended period - not a good situation to be in.