Get More Income From The Royal Bank Of Canada - Royal Bank of Canada (NYSE:RY)

Dividend investors seeking to optimize income from their investments should look at ex-dividend dates and time their purchases accordingly. The question is, how?

Analyzing historic performance for one of Canada's leading banks, the Royal Bank of Canada, I'll compare total returns around the previous 42 individual ex-dividend dates across three strategies.

Is it best to forfeit the next dividend payment and benefit from a lower stock price in the beginning, or should you grab that next dividend payment?

I will also show how much more or less in dividends investors can earn when buying the stock post the ex-dividend date.

Dividend investors seeking to optimize income from their investments should look at ex-dividend dates and time their purchases accordingly.

Timing the market is difficult. Timing to maximize income from dividends, however, is much simpler. Buying a stock before the ex-dividend date qualifies you for the next upcoming dividend payment, whereas foregoing the next ex-dividend date should in theory give you a better entry price point as the stock is expected to trade with a discount on the ex-dividend date.

Next week, precisely on July 24, the Royal Bank of Canada (NYSE:RY), one of my favorite dividend stocks in the financial sector, goes ex-dividend.

The Royal Bank of Canada is one of Canada's Big Five banks offering banking and financial solutions. It operates through the following segments: Personal and Commercial Banking, Wealth Management, Insurance, Investor and Treasury Services, and Capital Markets. It boasts a market cap of $115B and offers a yield of 3.7%.

The Royal Bank of Canada has rallied this year sending the stock up 17% but still underperforming the broad S&P 500 which managed a 20% YTD price performance. On the dividend front, the company has been paying a dividend since 1870. The company's dividend has weathered the storm of many crises and including the most recent financial crisis as management is very prudent in terms of cost and risk management. The company raised its dividend by 4.1% on February 22 to CAD 1.02 which translates to a payout ratio in the mid 40s and thus perfectly in line with the company's target range between 40-50% of earnings. The stock goes ex-dividend over the next fortnight on July 24.

To do so, I have analyzed how a $10,000 investment in the Royal Bank of Canada has fared so far on each of the ex-dividend dates over the last 10 years (42 observations in total) by comparing stock prices the day before the ex-dividend date, on the ex-dividend date, and the day after. This also factors in a tax rate of 15%.

The results for these 42 ex-dividend dates are completely one-sided. Expressed in % of most beneficial outcomes (i.e., the strategy that yielded the highest return), it looks as follows:

An unprecedented 88% of outcomes favor not buying before the stock goes ex-dividend, thus implying that RY stock behaves in practice virtually identically to what we would expect per market theory.

Thus, it is not really a question of whether to buy before ex-dividend or on/after, but more of how much time is needed to catch up with performance to make up for that initial dividend payment.

Figure 1: Overview of occurrences of best outcomes by stock by year

In every single year, apart from 2010, investors have fared better not buying the stock before the ex-dividend date. Both the "ex_div_+1" and "ex_div" strategies show pretty similar patterns over the last fifteen years. This implies that forfeiting the next dividend payment is by far the better strategy, while the decision whether to buy right on the ex-dividend date or to wait one more day appears to be unaffected by that behavior.

I have conducted a similar analysis on AT&T (NYSE:T) lately, and below you can find the aggregated results for your own studies and conclusions. I am planning to expand this analysis to multiple dividend-paying stocks across various sectors in order to generate more insights.

Figure II: Share of most beneficial outcomes by strategy (ex_div-1, ex_div, ex_div_+1) by stock

Next, I have calculated the actual price changes of the stock around the ex-dividend dates (you can interact with the dashboard) as follows:

This total change over the two days has been put in relation to the actual dividend payment, which serves as a proxy for by how much the stock price would have been expected to drop if it were solely to reflect that change.

By putting that total discount/premium in relation to the actual dividend per share, we get something I have termed "discount/premium in dividends" and which is depicted below for all the ex-dividend dates contained in the analysis.

A simple reading example for one of the latest ex-dividend dates on January 23, 2019, reads as follows:

In fact, considering the last 14 ex-dividend dates, 12 times the strategy to forfeit the dividend allowed investors to benefit from that pattern in RY stock price behavior. However, this is not 100% reflected in the chart above given that it depicts the stock price behavior over two days which implies that in some cases the stock very quickly recovered its ex-dividend price drop.

To better understand this behavior, let's create a tree map, which is sized based on the "discount/premium in dividends" metric. This clearly shows when the best opportunities have occurred in the past. Similarly, it also shows when investors have lost dividends by waiting too long for the stock price to drop following the ex-dividend date.

Again, the reading example helps understand what exactly is shown here.

I believe that this is a very powerful way of looking at the pricing action around ex-dividend dates for stocks.

To keep track of upcoming ex-dividend dates, I use the newly released and improved Dividend Calendar & Dashboard Tool (make sure to follow instructions). This handy tool allows me to view respective next ex-dividend dates and provides an automated dividend dashboard. Here is a sample screenshot of my portfolio's dividend performance and the dividend calendar:

In summary, dividend investors who want quick income from their investments without having to sell anything could screen the market for ex-dividend dates and time their purchases accordingly. However, in the case of RY, it makes more sense to forego the ex-dividend date and instead buy the stock on or after the ex-dividend date. Historically, this has produced superior returns.

Although, as so often, results are subject to one's own individual interpretation. It definitely shows that, for the Royal Bank of Canada, solely relying on the stock price to decrease following the ex-dividend date would have been the best decision in the cases covered in this article.

Naturally, the "buy" or "not buy" decision should depend on far more factors than just the ex-dividend date, but it is one variable to consider when trying to optimize your income.

Royal Bank of Canada is an excellent long-term dividend growth stock which sports the highest valuation among Canada's Big Five. Its history of consistency and stability bodes very well for dividend investors.

What do you think about the Royal Bank of Canada? Are you timing purchases in line with ex-dividend dates or not care at all about this?

If you like this content and want to read more about this and other dividend-related topics, please hit the "follow" button on top of the screen and you will be notified for new releases.

Disclosure: I am/we are long RY, T. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I am not offering financial advice but only my personal opinion. Investors may take further aspects and their own due diligence into consideration before making a decision.

Source: Seekingalpha.com

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