Investors who use a dividend capture strategy hope to sell a stock for as much as they paid for it and “capture” the dividend at no cost.
Dividend stocks can lead you to better investment returns and tax advantages. But can a dividend capture strategy let you profit even more from dividends?
Dividends are typically cash payouts that serve as a way companies share the wealth they’ve accumulated through operating the company. These payouts are drawn from earnings and cash flow and paid to the shareholders of the company. Typically these dividends are paid quarterly, although they may be paid annually or even monthly as well.
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Dividends can produce as much as a quarter of your total return over long periods.
What’s a dividend capture strategy?
A “dividend capture” strategy is a trading technique of buying a stock 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 a stock 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.
In theory, this can pay off when stock markets are rising. Of course, any strategy that involves buying shares 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. In fact, they may even exceed the dividend income.
In the end, a dividend-capture strategy may only really 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.
Our investment advice for beyond a dividend capture strategy
When investing, we think you will profit more from focusing on companies that have maintained or raised their dividends during both recessions and stock market downturns. These firms have proven themselves able to handle periods of earnings volatility. By continually rewarding investors, and retaining enough cash to finance their businesses, they provide an attractive mix of safety, income and growth.
Dividends are an important contributor to your long-term gains, and dividend-paying stocks tend to expose you to less risk than non-dividend-payers. That’s why the majority of your stocks should be dividend-payers. As you get older and closer to retirement, you should consider raising the proportion of dividend-paying stocks in your portfolio, to cut risk and improve the stability of your investment results.
Our investment advice:
No matter what kind of stocks you invest in, you should take care to spread your money out across the five main economic sectors: Finance, Utilities, Consumer, Resources & Commodities, and Manufacturing & Industry.
By diversifying across most if not all of the five sectors, you avoid overloading yourself with stocks that are about to slump simply because of industry conditions or investor fashion.
You also increase your chances of stumbling upon a market superstar—a stock that does two to three or more times better than the market average.
Our three-part Successful Investor strategy:
Invest mainly in well-established companies;
Spread your money out across most if not all of the five main economic sectors (Manufacturing & Industry; Resources & Commodities; Consumer; Finance; Utilities);
Downplay or avoid stocks in the broker/media limelight.
What are dividends?
Dividends are typically cash payouts that serve as a way companies share the wealth they’ve accumulated through operating the company. These payouts are drawn from earnings and cash flow and paid to the shareholders of the company. Typically these dividends are paid quarterly, although they may be paid annually or monthly as well. Dividends can produce as much as a third of your total return over long periods
Have you ever used the dividend capture strategy? What were your results?
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I have paper traded the dividend capture strategy with mixed results. Using a $25K buy and sell, with a few parameters. I liked to have the roll completed by 10 a.m. Usually only a day or 2 until the next ex-div date. Only a 4% or above yield. monthly ex-div were fine, but jump on the quarterly pays of a good blue chip. those stocks don’t give up as much stock price upon ex-div date.
I would concur that the best results came when the market was moving in a mild uptrend. Sideways markets don’t yield the desired results. My commission is $10 per trade, which reduced the costs.