How to Invest in Dividend Stocks for the Short Term

By Contributing Writer

• Overview

An investor can make a quick short-term gain on a stock with a healthy dividend yield by purchasing the stock just before the company declares the dividend, and then selling the stock back for the same price it was purchased for. In the meantime, the investor pockets the dividend. If the buyer has invested sufficient funds, and is using a discount brokerage account to keep fees at a minimum, he is going to profit.
• Step 1

Open a discount brokerage account, where the cost to buy and sell shares of stock will be very minimal (see Resources below). Fund this account well. As with many ventures, the more money you have to invest, the more you will make buying Dividend Stocks.
• Step 2

Locate a stock with a good dividend yield, preferably at least 8 percent. For example, if the stock is selling for \$10 per share, each share will receive 80 cents each year in dividends.

• Step 3

Find out what dates the dividends are paid for your stock. Typically, dividends are paid quarterly, or four times each year. So, for example, stock selling for \$10 per share and yielding 8 percent would pay 20 cents on January 15, April 15, July 15 and October 15 each year.
• Step 4

Buy shares of your stock using your discount brokerage account. Make certain that you buy before your stock goes ex dividend, typically 4 to 5 days before the dividend is declared. You must be a holder of record before the stock is ex dividend in order to receive the dividend (see Resources below).
• Step 5

Calculate your possible short-term gain. If, for example, you bought 500 shares of the stock selling for \$10 per share, and you were paid 20 cents per share dividend, you have made \$100 minus your brokerage commissions for buying and selling. If, for example, it costs you \$5 for each transaction, you have made \$100 minus \$10, or \$90 profit.
• Step 6

Sell the stock and collect your profit. Note that the example here assumes that you have bought and sold the stock at the exact same price. Remember, if the stock has dropped in price when you sell, your profit will diminish. But if the stock has gone up in price, you will have made even more on your short-term investment. You can find another stock with a good dividend yield and do the same thing all over again. And you can use the same stock you just used again in 3 months.
• Skill: Moderate
• Tip: Look at utility and power company stocks to find high-paying dividends.
• Tip: The price per share of a dividend stock tends to rise as the ex dividend date approaches, and tends to fall after the dividend has been declared. Your goal is to buy and sell at the same price, so you may be forced to hold the stock for a few days or weeks after the dividend has been declared in order to ensure that you get your investment back intact.
• Tip: Always use a discount brokerage account for the dividend play because the cost per transaction is very economical.
• Warning:
• Remember that all funds you invest in the stock market are at risk, especially in uncertain economic times. Never invest money in the stock market that you cannot afford to lose.