Yield Shark is a newsletter whose theme – getting more from your investments than a 0% CD – strikes a resonant chord with most fixed income investors and retirees with any money left over to invest.
Unfortunately, so far, one has to be a bit of an investment wizard – and a little lucky to boot – in order to match their portfolio returns.
The most recent SNAFU was with an LLC treated as partnership where I believe the distributions are treated as at least partial return of investment. Those investing in this stock, though, consider the distributions to be a “dividend” and do NOT expect the value of stock to be reduced significantly when normal, regular distributions are made (whether or not they are, for tax purposes, treated as a return of capital).
In thin holiday trading, many of us were stopped out of the stock because we kept or reset our $35 stop loss order even after a dividend was paid.
Only in this most recent January 2013 issue of Yield Shark did they spell out that this is what they meant and therefore the stock that only briefly traded under $35 and is now already back to $39 is still in the YS portfolio – even though it is NOT in our portfolios after we incurred an unwelcome loss.
Most Brokers Reduce Stop Loss Limits By The Amount Of A Dividend
Here is where the trouble comes in.
Most brokers will automatically reduce the trigger price of a stop loss order by the amount of any dividend or distribution.
On the surface, this makes sense as, theoretically, a stock will trade down by the amount of the dividend on the ex-dividend date. For most securities, though, we are talking a very small percentage of the stock price being paid out – in some cases only a penny or two.
Now I do agree that any abnormal return of principal or high percentage dividend should reduce the trigger price.
Note: I do NOT use the term “limit price” so as not to confuse the reader between stop loss orders (which become a market order when the limit is hit) and stop loss limit orders (which become a limit order at the time of trigger).
What happens though, over time, is that:
- You accumulate dividends from the security
- You pay tax on those dividends, no longer at a preferred tax rate
- Your stop loss trigger price gets reduced again and again and again until what may have been a 10 or 15% capital loss if triggered now is higher
- Your dividends received are still taxed at higher rates and NOT used to offset the capital loss on the sale of the stock; even going so far as to carry forward that loss into future tax years being a possibility
Hence, I don’t like brokers automatically lowering my stop loss orders when a REGULAR dividend is paid out.
What Is Yield Shark Doing Wrong?
Based on the comments I have seen on other websites, this Yield Shark subscriber is not the only one who:
- Didn’t get the memo that the YS team expected us to have a broker who would automatically reduce our orders by the dividend price, but instead took the YS team at their word that a $35 stop loss good until cancelled was exactly that – “good until cancelled” NOT “good until modified”.
- Thought that the $35 price was derived from technical analysis chart work which, as far as I know, does not adjust itself for payment of ordinary, regular dividends.
- Would like to see a stop loss price column in every newsletter and preferably also on the web, frequently updated, to let us know exactly where our stops are supposed to be set.
- Would like to see YS not even consider pink sheet stocks or any other security where only “some” brokers allow online stop loss orders to be placed without special contact, knowledge or difficulty.
- Would rather see things like this spelled out clearly BEFORE they happen rather than have them explained in the Q&A after the fact when large numbers of subscribers have already been bitten and write in to find out what’s going on.
So while we are still happy to be a Yield Shark subscriber and have been cutting the team some slack as they are only just over 6 months old with this investment newsletter we would like to see some needed improvements happen rather quickly.
Here is a link to subscribe to Yield Shark, for which as of this date we have NO AFFILIATION with the company despite having tried.