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Ric Cox


Richard has more than two decades of experience in the financial markets and has had his writing appear on CNBC, NASDAQ, Economy Watch, Motley Fool, and Wired Magazine

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10 min read 26th of Jun, 2018
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Dividend Capture Strategy Tutorial

Dividend capture is a financial market strategy that involves timing-oriented trades of stable stocks that pay dividends.  In practice, a dividend capture strategy requires an investor to buy shares of stock just before its ex-dividend date.  This allows an investor to “capture” the dividend and then immediately sell the stock once the dividend payment is made.  In many cases, the shares of the underlying stock are held for just a single day.

Essentially, this is a two-trade system that is designed solely to allow investors to benefit from a stock’s dividend without encountering the risk of holding shares for an extended period of time.  In any market investment, the longer an asset is held, the greater the potential it has to fall in value.  Unlike most traditional trades in equities (where a stock is held until its share price generates a profit), the central purpose of the dividend capture strategy is to receive a dividend payment and exit the position.

Dividend Capture Risk Factors

Income-oriented investors use the dividend capture strategy as an easy, straightforward method of producing income with limited exposure to capital losses.  This is primarily due to the fact that the dividend stock is only held for a short period of time.  However, it must be noted that trading exchanges will automatically adjust a stock's share price (negatively) on its ex-dividend date by an amount that reflects the upcoming dividend payout.

Additionally, taxes and trading costs can also inhibit profit potential when using the dividend capture strategy.  This is the reason many corporations engage in these types of investment strategies, as they have limited tax liabilities for dividend income that is received from other corporations.  Dividend capture is very similar to the idea of “trading dividends,” and some financial planners discourage individual clients from using this strategy because of the trading commissions, time, and research required to achieve profitability using this approach.

Dividend Capture Strategy Timeline

To understand the best way to profit from the dividend capture strategy, we must first understand how dividend payments are typically processed.  Of primary importance is the Dividend Timeline, which includes four key dates.  There are several financial websites offering freely accessible calendars that show when these key dividend dates on popular stocks become due:

  • Declaration date: The company declares its intention to pay a dividend on this date (this occurs well in advance of the actual dividend payment).  Larger companies tend to announce their dividends in conjunction with quarterly earnings reports or through separate press releases.
  • Ex-dividend date (ex-date): The cut-off date for eligibility to receive the stock’s dividend payment. Anyone buying the stock after the ex-dividend date won’t be entitled to receive the next dividend payment (and must wait for the next payout period in order to receive the dividend).  On the ex-dividend date, the stock price usually drops in value by an amount that is roughly equal to the declared dividend value. Traders utilizing the dividend capture strategy must buy the stock before the ex-dividend date.
  • Record date: The company records shareholder ownership (confirming eligibility to receive a dividend payment) on this day.  This date occurs on the first business day that follows the ex-dividend date.  For dividend capture traders, no action is required on this day.
  • Payment date: On this, date dividend payments are distributed to shareholders (usually two weeks to one month following the ex-dividend date).

As a basic example, let’s assume a stock’s ex-date is Wednesday, August 26 (two trading days prior to the record date).  The must-own day for the stock would be Tuesday, August 26 (one day prior to the ex-date and three days prior to the record date).

Investors owning the stock before the end of the trading session on August 26 will be eligible to receive the dividend.  In other words, investors must buy the stock by 3:59 pm on August 26 in order to be eligible for the dividend.  Investors could technically sell the stock as early as 9:31 am on August 27 and still receive the dividend on the dividend payout on the Payment date.

Benefits Of The Dividend Capture Strategy

For many investors, the appeal of dividend capture trading lies in the simplicity of the process.  In-depth fundamental analysis of each company isn’t a requirement and trading parameters generally require very little technical analysis in order to identify price levels for entries and exits.

Under the dividend capture strategy, investors are not required to hold the position until the final payment date in order to receive the guaranteed dividend payout.  Basically, investors can purchase a stock prior to the ex-dividend date and then sell the position on (or after) the ex-dividend date in order to successfully complete the technique.  As long as these simple rules are followed, investors will receive a guaranteed dividend payout for their efforts.  If share prices fall after the ex-dividend date, investors still have the option to way until market valuations return to their prior levels before closing the position.

Dividend Stock Selection

Generally, stock dividends are paid quarterly or annually.  In some cases, investors will receive dividend payouts once per month.  Fortunately, investors don’t need to wait for all this time to pass in order to capture these guaranteed dividend payouts.  Of course, individual stock selection and macroeconomic trends that are visible in the market can have a tremendous influence on the profitability performances of each investor’s trading strategy.

One of the most important secrets to success when implementing the dividend capture strategy is to diversify the stocks that are chosen to be used as part of a trading portfolio.  There are many dividend stocks available in the market and diversification practices across industry sectors can help protect investors from macroeconomic shocks that might occur in certain areas of the market.

  • Focus on stable large-cap stocks and mid-level dividend yields (3-4%)
  • Diversify stock selections across industry sectors
  • Rolling over positions and re-invest profits into new dividend capture trades
  • Exercise patience in the event share prices drop after the ex-dividend date

For example, many energy companies are known for the high dividend payments that are offered as a reward for shareholders.  However, there are many different types of macroeconomic influences which might positively or negatively affect the share prices of popular stocks throughout the sector.  As a result, a dividend capture portfolio that focuses solely on the energy sector might perform very well in situations where energy commodities are rallying.  However, those same stock choices might underperform significantly in cases where valuations in energy markets are trading under pressure.

For these reasons, individual stock selection is key and market experts argue will usually argue that a diversified portfolio focusing on mid-cap and large-cap companies with a stable history of dividend growth tends to work best in terms of its ability to generate maximized profitability results.  Traders might also consider buying exchange-traded funds (ETFs) and high-yielding stocks of foreign companies offered on the major European and U.S. trading exchanges as a way to find new opportunities to profit.

How To Profit Using A Dividend Capture Strategy

Fortunately, the variety of dividend stocks that is currently available to investors is quite expansive.  Nearly every day, investors can find at least one publicly-traded company that is due for an ex-dividend date.  This means investors will have consistent opportunities to benefit from elevated dividend payouts that are made available in the market.

To consistently achieve profits using the dividend capture strategy, successful investors can roll over holdings into new positions and capture stock dividends at each step of the process.  Most importantly, investors are not required to hold positions for an extended period of time and this greatly reduces risk exposure when compared to most other stock investment strategies.

One downside to the strategy is that it requires a substantial capital outlay for the initial investment.  However, the high stock yields associated with many Dividend Aristocrats help investors take advantage of elevated interest rate payments that are guaranteed and compound frequently.  These compounded yield returns can then be re-invested into the next dividend capture trade and relative position sizes can continue to grow over time.  Experts suggest optimal returns can be achieved when investors focus on large-cap companies offering mid-level dividend yields of roughly 3%.  This approach helps ensure reduced risk exposure while maintaining attractive dividend payouts.

Enhanced Returns Using Alternative Strategy Techniques

As a variation on the popular dividend capture strategy, sophisticated investors will often find ways to capture greater returns by selling or buying options that can profit in the event that share prices fall on the ex-dividend date.  There are several different option types that can be used under these scenarios and traders should review our options tutorial to learn about how these strategies operate.

Additionally, market research shows that announcements of special dividends can increase overall profitability when compared to dividend returns that can be captured through scheduled dividend payouts.  The reason is that special dividends offer one-off dividend payments that are structured differently (and tend to be much greater) than the regular dividends made available on a monthly or quarterly basis. This elevated dividend yield makes it more likely that captured will be negated by broker fees and fluctuations in the market that occur around the ex-dividend date.

Trading Summary: Dividend Capture Strategy

  • Dividend capture strategies offer an income-focused approach to active stock trading.
  • Dividend captures are popular with active money managers and day traders because of the high trade turnover required with this strategy.
  • Disadvantages of the strategy include the high capital outlay that is often required, the risk of initial declines in the stock, and the active trade management involved when opening/closing positions.
  • Initial trading risks are encountered when stock prices drop in value by an amount that is roughly equal to the declared dividend value.
  • There are two ways to profit from dividend capture strategies.
  • The first way is to wait for share prices to increase by an amount greater than the dividend and then sell the stock (assuming ownership is confirmed on the recording date).
  • The second way is to buy a stock at a low price low when a company announces its dividend (or shortly thereafter) and sell the stock the day prior to its ex-dividend date (capitalizing on the rise in prices).
  • The strategy requires that investors exhibit precise timing to buy dividend stocks at the most appropriate levels, hold the stock for a short period of time, capture the stock’s dividend, and finally sell the stock with limited transaction costs.
  • In contrast to most traditional dividend investments (which involve buying/holding the stock shares of dividend-paying companies in an effort to generate a steady stream of income), the dividend capture strategy is an active approach to trading which requires frequent buying/selling, and a willingness to hold stocks for a short period of time (long enough to collect the dividend).
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