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Companies that pay dividends have a “record” date. That raises two interesting questions investors often ask.
Does the record date determine who owns the stock on that day and who gets the dividend? If so, why not buy stock the week before the day of record, collect the dividend and then sell the stock? Here is what you need to know.
There are a number of dates related to payments from dividend stocks:
“Dividend capture” is the trading technique of buying dividend stocks just before the dividend is paid, holding it just long enough to collect the dividend, then selling it. If you can sell it for as much as you paid for it, you have “captured” the dividend at no cost, other than the transaction costs.
To do this, you would buy shares in dividend stocks just before the ex-dividend date, so that you would be a shareholder of record on the record date, and would receive the dividend. Because the stock falls by the amount of the dividend on the ex-dividend date, the strategy then calls for you to wait for the stock to move back to the price where you bought it before the ex-dividend date. At this point, you sell the stock for a break-even trade.
This can pay off when stock markets are rising. Of course, any strategy that leads you to buy can pay off when stock markets are rising. However, you have to pay a brokerage commission to buy the shares, and a commission to sell. The commissions can eat up much of the dividend income. They may even exceed the dividend income.
Dividend-capture strategies may have appeal for securities dealers or brokers who are executing huge trades with very low transaction costs. They may also have tax benefits, particularly for corporations. But the average investor has little chance of making a significant profit.
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