The ultimate guide to dividend capture strategies

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The ultimate guide to dividend capture strategiesThe Ultimate Guide To Dividend Capture Strategies

By Dividend. November 23, 2012, 11:38:02 AM EDT

The dividend capture strategy is designed to allow income-seeking investors to hold a stock just long enough to collect its dividend. But while this strategy is fairly simple academically, it can be a challenge to correctly implement in many cases.

Many investors who seek income from their holdings look to dividends as a key source of revenue. A dividend is a periodic cash payment that stockholders receive, which represents their share of the issuing corporation's current profits. Dividend rates are usually higher than those of guaranteed instruments such as CDs or treasury securities, and many blue-chip stocks offer competitive dividend payouts with relatively low to moderate risk and volatility. But some investors are solely interested in receiving a stock's dividend when they have no desire to hold it otherwise. This guide is for those investors looking to perform what's known as "dividend capture."

Dividend Dates

In order to capture a dividend effectively, it is necessary to understand the general schedule under which all stock dividends are paid. There are four key dates that occur in the dividend payment process:

Declaration Date  - This is the date upon which the board of directors of the issuing corporation declares that a dividend will be paid. The declaration will specify the amount of the dividend as well.

Ex-Dividend Date  - The day the stock price is accordingly reduced by the amount of the dividend. Investors must buy a stock before the ex-date to receive the dividend.

Date of Record  - The day a company looks at its records to determine shareholder eligibility.

Pay Date  - The day the dividend is actually paid to the shareholders.

How the Strategy Works

Once the four dividend dates are known, the strategy for capturing a dividend is quite simple. The investor merely purchases the stock prior to the ex-dividend date and then sells it either on the ex-dividend date or at some point afterward. Because the investor owned the stock on the ex-date, the dividend will automatically be paid regardless of whether the investor still owns the stock by the time it is constructively received. The high turnover generated by this strategy makes it popular with day traders and active money managers.

Advantages of the Dividend Capture Strategy

Probably the greatest benefit of using this strategy to capture dividends is that there are thousands of dividend-paying stocks to choose from, and some pay higher dividends than others, albeit with greater risk and volatility. But an experienced capture strategist can find a stock with an ex-dividend date for every day of the month. By buying stocks the day before the ex-date each day, theoretically he could capture a dividend every trading day of the year in this manner. Obviously, this could lead to big profits if the dividend payouts are reasonably high. This strategy also does not require much in the way of fundamental or technical analysis. A subscription to a detailed dividend calendar that provides a comprehensive list of all of the companies that will declare and pay upcoming dividends is perhaps the only research tool that is really necessary for success. See our complete Ex-Dividend Calendar here.

Limitations of the Dividend Capture Strategy

Although capturing dividends can be an easy way to make quick income, it comes with several drawbacks. A list of the major disadvantages includes:

Negative Price Adjustment on the Ex-Dividend Date

Loss of Favorable Tax Treatment

Market Action

Most capture strategists are counting on the stock price to not fall by the entire amount of the dividend due to external market forces. For example, a stock that closes at $30.00 the day prior to the ex-date of a $1 payout should theoretically open at $29.00 on the ex-dividend date. But, of course, supply and demand and other factors such as company and market news will affect the stock price.

While the capture strategist hopes that the adjustment is less than the dividend, these forces can often push the price in the wrong direction and more than offset the dividend payment with a capital loss. For example, if bad news came out the morning of the ex-dividend date, then the aforementioned stock might drop to $28 a share, leaving the strategist with a net loss of $1.50, unless the shares are held until the price rises back to the breakeven level. This issue is further exacerbated by institutions and day traders seeking to profit from the inevitable reactionary price movements that occur when dividends are declared and paid. Of course, it should be noted that this volatility can also result in additional gains as well as losses in many cases.

The Bottom Line

Be sure to visit our complete recommended list of the Best Dividend Stocks . as well as a detailed explanation of our ratings system here .