How many times have you heard, “you can’t time the market?” The overall idea being that no one knows what the market will do next, and therefore any attempt to try timing your purchases is futile. While this may be true in a general sense, the fact is that there are certain specific situations where timing works and makes a lot of sense. Here are some examples: Every time a stock goes ex-dividend (the date that a dividend paying stock trades with the next dividend going to the buyer) the price of the stock opens with a drop in price equal to the dividend. For those looking longer term, and are interested in buying a dividend paying stock at a lower price, it is often the case that a dividend paying stock will drop more than the dividend following ex-dividend day, and then more than fully recover as the next ex-dividend day approaches. Reviewing a dividend paying stock’s history often provides an excellent indication as to what will happen on and following ex-dividend day. While past performance is no guarantee of future results, in this case it is a very good indication.
Another example of where timing can work nicely is in the case of MLPs, BDCs and REITs where growth is often achieved through the sale of additional stock. Since these types of companies must, by law, distribute 90% of their profits, one of the avenues that they have for growth is to sell more shares. Very frequently this is incorrectly considered a dilution of the stock as a “knee jerk” reaction, and therefore the price per share drops as soon as a sale of stock is announced. In many instances, although not always, the funds generated by the sale of stock are accretive because the funds generated will be employed immediately and increase profitability per share. Again, a review of the company history, in addition to reading what the company says about how the funds will be employed provides a strong indication of what the long term impact of the sale of stock will be.
Timing purchases following the announcement of a secondary sale of stock frequently makes a lot of sense. Finally, dollar cost averaging into a stock is a form of timing that is almost always advantageous for those who have funds to invest on a regular basis. Dollar cost averaging (purchasing the same dollar amount of an equity on a regular basis: monthly, quarterly, etc.) causes fewer shares to be bought when the price is high and more shares to be bought when the price is low. There are other timing issues, such as seasonality, but they don’t have the specificity or clarity of the above mentioned techniques. So, while it is truly impossible to predict what the overall markets will do on a short term basis, there are situations where the timing of specific equities in specific situations does make sense, as long as you do your homework and proper due diligence.
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Bob Boyd invites you to visit the High Yield Equity Stock Report for further articles and a regularly updated high yield dividend stock list: http://www.highyieldreport.blogspot.com This site is dedicated to assisting investors with their due diligence in the highly volatile and often misunderstood category of high yield dividend investing as part of a diversified investment program.
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