Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Dividend-Capture Strategy

What it is:

The dividend-capture strategy is the act of purchasing a stock before it goes ex-dividend, capturing the dividend and then selling the stock and buying another stock that is about to go ex-dividend.

How it works (Example):

For example, let's assume you purchase 100 shares of Company XYZ before it declares its next dividend. When Company XYZ finally declares the dividend, investors flock to the stock. That drives up the price until the ex-dividend date. The ex-dividend date is usually two business days before the record date, which is the date the company finalizes the list of shareholders who qualify as "holders of record" and will receive the upcoming dividend. Thus, the ex-dividend date is a deadline for purchasing the stock and still being able to receive the upcoming dividend.

Once the stock "goes ex-dividend," the price falls to reflect the value of the dividend payment. After the ex-dividend date, buyers of the stock or fund will no longer receive the security's upcoming dividend payment. A stock may or may not bounce back a few days after it goes ex-dividend. This is important to understand because you must hold the shares for at least 61 days if you want the dividend to be taxed at the lower 15% dividend rate.

As you can see in our chart, the Chile Fund's share price climbed after a dividend was announced and then fell sharply once the fund went ex-dividend.


Why it Matters:

By employing a dividend-capture strategy, investors can capture 50% more dividends in any given year from the same investment dollars. Let's say an investor purchases a stock that pays quarterly dividends (most companies pay on a quarterly basis). In this case, the investor would receive four dividend payments throughout the year. However, if that same investor uses a dividend-capture strategy, then he or she would not hold the stock for a full year. Instead, the investor would purchase the stock right before its ex-dividend date and would sell it 61 days later. After the sale, he or she would then turn around and plow that money back into another company that is about to pay a sizable dividend payment.

If you assume a 61-day holding period for each captured dividend, this investor would be able to pocket six dividend payments during the year (365 days / 61 = 6) instead of the traditional four (quarterly) -- that's 50% more dividends from the same investment dollars. Even better yet, by focusing his or her dollars exclusively on those companies that offer the very highest dividend payments in any given period, the investor using the dividend-capture strategy could come out even further ahead.

Many investors and mutual funds produce attractive returns with this strategy, but it does involve higher trading costs and the risk that share prices will not bounce back after a stock goes ex-dividend.

Remember also that companies are usually not obligated to pay dividends. During hard times companies that do pay dividends may cease or lower them. Slower-growing, established companies are more likely to have the resources to pay dividends but young companies that need all the cash they can get to grow their businesses usually do not pay dividends at all.