Aiming for dividend capture strategy returns may look like a sure way to make money. But there are risks you need to watch out for

“Dividend capture strategy” returns are the 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, you have “captured” the dividend at no cost, other than the transaction costs.

This strategy is executed by buying a stock just before the ex-dividend date, so that you will be a shareholder of record on the record date, and will 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, in order to benefit from the dividend capture strategy returns, you sell the stock for a break-even trade.

The Growing Power of Dividends Learn everything you need to know in '7 Winning Strategies for Dividend Investors' for FREE from The Successful Investor. The Best Canadian Dividend Stocks to Buy: REITS Canada and other Top Canadian Dividend Stocks.  I consent to receiving information from The Successful Investor via email. I understand I can unsubscribe from these updates at any time.

Here are key dividend payment dates you’ll need to know to aim for dividend capture strategy returns

The declaration date is the date on which a company’s board of directors actually sets the amount of the next dividend. Typically it is a number of weeks in advance of the actual payout date.

The record date is the date on which a person has to actually own shares in the company in order to receive the declared dividend.

The ex-dividend date is typically the last business day before the record date. The ex-dividend date is in place to allow pending stock trades to settle. In short, the security trades without its dividend any day after the ex-dividend date. If you buy a dividend-paying stock one day before the ex-dividend you will still get the dividend; if you buy on the ex-dividend date or after, you won’t get the dividend. The reverse is true if you want to sell a stock and still receive a dividend that has been declared: you will need to sell on the ex-dividend day or after.

The payable date is the date on which the dividend is actually paid out to the shareholders of record.

Profits may prove very elusive for small investors looking to profit from dividend capture strategy returns

A dividend capture strategy 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 exceed the dividend income.

In addition, the mechanical aspects of the strategy may lead you to disregard the three key parts of our Successful Investor approach: investing mainly in profitable, well-established companies; spreading your investments out across most if not all of the five main economic sectors; and downplaying or avoiding stocks in the broker-media limelight.

Dividend capture strategies may have appeal for securities dealers or brokers executing huge trades with very low transaction costs. But for the average investor, there’s little chance of making a significant profit.

Bonus tip: Focus instead on buying and holding top dividend-paying stocks

When investing, we think you will profit more from focusing on buying and holding companies that have maintained or raised their dividends during both economic 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 from these companies will be 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.

Bonus tip 2: Look for a reasonable dividend payout ratio, instead of possible dividend capture strategy returns, for a more secure way to profit

One of the best ways to judge whether a company will keep paying its dividend, or even increase it, is the dividend payout ratio. This simply measures what portion of a company’s earnings or cash flow are allotted to paying dividends.

If a company keeps its payout ratio fairly steady, and its earnings grow, the amount you receive in dividends should also grow. However, if a company must keep paying out a larger and larger percentage of its earnings just to maintain the dividend, it is reasonable to wonder whether the company is in decline and the dividend is in danger of being cut.

You need to look at other factors as well, of course. The company may be going through a low cycle in its industry, or have a temporary problem it has a good chance of solving.

What have your experiences been with the controversial dividend capture strategy?

Aside from the dividend capture strategy, what controversial investing strategies have you used, and what were the results?

This post was originally published in November 2016 and is regularly updated.