I’m wondering if there is a way to make money by exploiting the different dividend dates of similar companies. For example, Emera Inc.’s EMA-T dividend record dates are typically Feb. 1, May 1, Aug. 1 and Nov. 1, whereas the record dates for Fortis Inc. FTS-T are usually on the 15th of the same months. Until recently, I have had my utility-sector money split between the two companies. But with the staggered record dates, I realized I could have all my utility-sector money in Emera and then, after the record dates, I could sell Emera and put all my utility money in Fortis. Doing so gets me double the dividend payments compared to splitting my money between them. After the Fortis record date passes, I can switch back to Emera for the next quarterly cycle. Is this a sound strategy?
If it was a sound strategy, hedge funds would be borrowing billions of dollars to buy and sell Emera and Fortis – and every other dividend company where such an “opportunity” existed – and doubling their dividend income.
Sadly, the stock market doesn’t give away free lunches like that.
One obvious problem with this strategy is that you’d potentially be paying a lot of trading commissions and, in a non-registered account, capital gains taxes as you trade in and out of these stocks.
But leaving commissions and taxes aside, the strategy has a fundamental flaw: All else being equal, stock prices tend to fall right before the record date.
Let’s say you buy Emera in October with the expectation of holding it until the record date of Nov. 1, in order to lock in the next dividend payment. You then sell Emera and move on to do the same thing with Fortis. Free money, right?
Nope. Here’s the problem. When you sell your Emera shares, the buyer of those shares is not going to get the next dividend. That dividend is going into your pocket, not the buyer’s. The price of Emera will therefore fall (again, all else being equal) to reflect the fact that the dividend is no longer included.
So, what you gain in the dividend you lose in the price you receive for your Emera shares. The price adjustment actually happens one day before the record date, on what’s known as the ex-dividend date. (Stock trades take two business days to settle, so anyone buying on or after the ex-dividend date will miss the next dividend payment.)
Lots of other factors also affect stock prices, so the adjustment on the ex-dividend date won’t necessarily match the value of the dividend exactly. In some cases, the price might even rise. But the value of the dividend will no longer be reflected in the price.
Bottom line: You can’t game dividend dates to increase your returns. The market will make sure of that.
In a recent column, you wrote that in a family registered education savings plan (RESP) each child can only access $7,200 of Canada Education Savings Grant (CESG) money. I don’t understand this. In our case, after 20 years the original grant money has grown substantially. What will happen to the growth if each beneficiary can only withdraw $7,200? And if multiple family members have set up RESP accounts for both of our two children, how can we confirm how much each child has withdrawn? I can’t see it in the statements we get from our financial institutions.
First, let me clear up some confusion. The value of the grants in an RESP does not increase with the market value of the account. For example, say a beneficiary has received the maximum of $7,200 of CESG in his or her RESP, and the investments in the account subsequently rise by 50 per cent. The beneficiary will still have $7,200 of grants; the additional $3,600 will be classified as investment earnings.
When a beneficiary is enrolled in a qualifying postsecondary program, grants and earnings can be withdrawn as an educational assistance payment (EAP), which is taxed in the hands of the student, often at a relatively low marginal tax rate. The financial institution – also known as the RESP promoter – keeps track of the dollar value of grants, investment earnings and contributions in the account.
With a family RESP, grants can be shared among beneficiaries. However, it is the responsibility of the subscriber (usually a parent or grandparent) to make sure no beneficiary exceeds the $7,200 CESG withdrawal limit, or the excess will have to be repaid to the government. When there are multiple family RESPs at different financial institutions, subscribers have to be even more careful.
Before you make an EAP, contact the financial institution(s) and ask for the balances of CESG, earnings and contributions in the account, as well as the amount of CESG withdrawn for each beneficiary to date. If a beneficiary is getting close to the CESG withdrawal limit, ask the financial institution to withdraw only enough CESG to hit the $7,200 cap, with the balance of the EAP classified as earnings.
I use the Watchlist on Globe Investor to track my stocks, but it doesn’t recognize the iShares MSCI USA Quality Factor ETF QUAL-A. Can you please add this exchange-traded fund to The Globe’s list of stocks.
When calling up stock quotes or adding securities to a Watchlist on Globe Investor, the autocomplete feature can be a bit finicky at times. This is especially true for U.S. stocks and exchange-traded funds. But some trial and error usually fixes the problem.
In the case of QUAL, you won’t get a match if you enter only the stock symbol. Nor will the autocomplete work if you enter only the first two or three words of the ETF’s name. However, if you type “iShares MSCI USA Quality” (without the quotes) in the search box, you’ll find the ETF you’re looking for. If you are having trouble finding any other securities, a little tinkering should resolve the issue.
E-mail your questions to jheinzl@globeandmail.com. I’m not able to respond personally to e-mails but I choose certain questions to answer in my column.
John Heinzl