Bank Dividend Yields Rise As Share Prices Fall

Investors likely to see the dividend yields rise after most NSE– listed Banks’ Share Prices Fall.

How to Interpret this information

If you buy the stock before the ex-dividend date, you'll receive the upcoming dividend payment. If you buy on or after the ex-date, you won't. The seller gets the dividend instead.

This Means that the phenomenon we are observing of falling share prices after the ex-date is normal because share prices usually adjust on the ex-date to reflect the dividend distribution

The price generally decreases by roughly the amount of the dividend to account for the cash being distributed to shareholders.

This then means that implied Dividend yield will go up. See formula below:

Dividend Yield= Dividend Per Share/Share Price.

How does this Affect Total Return to an Investor?

Total Return= Dividend Yield + Capital Gains(Losses)

Example

An investor Buys 100,000 shares of XYZ ltd. On 24 January 2024. The Share Price is sh. 20 on this date. The company Issues a dividend of sh. 2 per share with the Ex-date being 24th March 2024. After the date, the share price falls to sh 17 a Share. What is the investors return as at 25th March 2024?

We’ll Ignore transaction costs.

Dividend yield= 2/17= 11.76%

Unrealized Capital Losses=15%

Total return= 11.76-15= -3.24%

How do we Invest?

It’s usually best to contact your investment advisor to know the right price to buy a given stock as this materially affects total return on a given stock.

Our View:

We will look at an NSE listed Bank with respect to the Total Return and try to identify any Arbitrage Opportunities that may exist to make a risk-free gain.

The question we will attempt to answer is: Can we make a risk free gain by buying a stock cum-dividend and immediately selling Ex dividend?*

Let us have a look at Standard Chartered Bank (KE: SCBK)

Cum-dividend Share Price: Sh.195.25

Ex-Dividend Share Price: Sh. 180.75

Dividend Yield: 23/180.75= 12.72%

Capital Loss: (180.75-195.25)/195.25= (7.42%)

Transaction Costs**: ~3.68% (~1.84%+~1.84%)

Assuming you buy 1000 shares;

Cost of buying= 195.25*1.0184*1000= Sh. 198,843

This means you would have to have Sh. 198,843 in your account before you can be able to buy SCBK shares worth Sh. 195,250.

Selling on 22rd April,

Ex Dividend Share Price: Sh.180.75

To sell 1,000 Shares;

180.75*0.9815*1000= Sh. 177,406

Dividend Payable after Tax= Sh 23*0.95* 1000= Sh 21,850

Total Return= -198,843+177,406+21,850

Total gain= Sh 413