Dividend Capture Strategy

The dividend capture strategy is fairly simple, but is not without its drawbacks. First let’s explain what it is. As you may know, there are many companies that pay dividends to stockholders. If you own shares in a stock on the day before the stock starts trading “ex-dividend” you are entitled to receive the dividends owed on that stock, even if you sell it once it starts trading “ex-dividend”. If you buy the shares on, or after the ex-dividend date, you do not get to collect the next dividend payment.

So the dividend capture strategy simply entails looking up the ex-dividend dates and purchasing stocks of various dividend-paying companies before the ex-dividend day and selling your holding once they start trading ex-dividend. Your goal is then to find another stock with a quickly approaching ex-dividend date, wash, rinse and repeat. Instead of getting four quarterly dividend payments, you might get eight quarterly dividend payments – or another way of saying this is that if you could find two stocks (as an example) that had different ex-dividend schedules and each had a 4% yield, your portfolio could potentially get an 8% yield by switching between these stocks on a regular basis.

Sounds great, doesn’t it?

Hold the phone. On thing about stocks that pay dividends is that there is a slight run up in price (on average) approaching the ex-dividend date and then a drop in price (on average) on the ex-dividend date approximately equivalent to the dividend per share amount. So you could be paying a premium to purchase the stock and selling at a lower price after the ex-dividend date. If the dividend payment only makes up the capital loss, what was the point?

Daily fluctuations can mask the run-up and drop in the share price, but over time it averages out. Many funds that have tried to run a dividend capture rotation strategy have not only failed to live up to the hype, they were especially clobbered in 2008 due the high allocation to financials.

Today’s post was brought to you by the letter Q, and the number 4. (God I miss watching Sesame Street!)

Preet Banerjee
Preet Banerjee
...is an independent consultant to the financial services industry and a personal finance commentator. You can learn more about Preet at his personal website and you can click here to follow him on Twitter.
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Showing 18 comments
  • Canadian Capitalist

    Congratulations on the mention in the National Post and Ottawa Citizen today. Wish I had more cash to buy at these levels :)

  • Susan

    Great article! I’ve heard of people trading for dividends and often wondered how it works.

  • gene

    I read of a similar strategy in Canadian Moneysaver, where the investor would buy a dividend payer about half way between dividend payments. He would then enjoy more of that run-up pre-dividend that you mentioned. I don’t recall his sell point, but it was likely on or just following the ex-dividend date.

  • Patrick

    One word: arbitrage.

    I can’t believe anyone would actually take this strategy seriously.

  • Dividend Growth Investor

    I once wrote an article about dividend capture strategy where I said that it is the illusion of getting something (dividend) for nothing..

  • FearLES

    It can actually work not too bad if you have a TFSA and a discount brokerage and you are buying a stock you don’t mind hanging on to if you can’t break even on the stock buying/selling.

  • Patrick

    @FearLES: I don’t buy it. Arbitrage will make the price of the share drop by exactly the dividend amount (on average) on the ex-dividend date, because it’s worth exactly that much less on that day. Dividend capture will work only to the extent that arbitrage doesn’t work, i.e. to the extent of market inefficiencies.

  • FearLES

    right now the market definitely isn’t efficient.

  • RM

    What about this?

    In a bullish market, choose an undervalued stock (low P/E) with a very high dividend (6-15%)… purchase about a month or two prior to the ex-div date.

    The stock should run-up with the anticipation of the dividend.

    Sell prior to the ex-div date, capture any run-up profit and avoid the tax on the dividend.

    Not saying this is going to happen all the time, but it makes sense right?

  • Patrick

    No, it doesn’t make sense. Someone must be on the other side of those trades. What moron will sell it to you at the low price, then buy it at the higher price?

  • Patrick

    @RM – perhaps I owe you an apology. Your argument is more subtle than I realized, and is based on the difference in taxation between dividends and capital gains. I still believe arbitrage will eat any profit you hope to make, but the point can’t be made using the “what moron” argument I used in my last reply.

  • Perry Brown

    Is it true that the reason a stock price enjoys a runup in price, the days before an ex-dividend day, are mostly because of funds and institutional investors purchasing the stocks for their ” dividend capture portfolios” and then the stock price falls later as they sell the stock to move their money into another dividend play. If so, anyone know of a stock forcaster program that tracks stocks that typicaly do not move in price surrounding their dividend payments?

  • TOM

    THE KEY IS TO SELL THE DAY BEFORE THE EX-DATE (EOD). THE LARGE MAJORITY OF THE TIME, YOU’LL STILL RECEIVE THE DIVIDEND AND YOU GET THE INCREASE IN SHARE PRICE.

    • Sam Viera

      Hi – Thanks for your Post. Are you speaking from experience? Have you received dividends this way? Most people seem to dissagree with selling at EOD before the ex- dividend date and and get any dividneds. It would be awasome if you could.

      Thanks,

  • Dividendium

    @Perry Brown – I’m not sure how a program could determine if a stock did not move in price surrounding it’s ex-dividend dates. Generally the amount of the dividend payout is less than the daily price gyration of the stock, so the one cannot be distinguished from the other.

    But one way to hedge this strategy and reduce the risk some is to use covered calls with your dividend capture. Here’s a service that finds the most profitable covered call dividend capture trades each day:
    http://www.dividendium.com/PremiumServices_InflatableDividends.aspx

  • pcroscia

    Dividend capture strategies don’t work effectively, the institutional investors can benefit because they have more money to invest

    Here’s a strategy that might work daily with the idea of not recieving a dividend. This strategy has many possibilities for winning and recovering potential losses.

    Buy a put before market close prior to market close and exdiv date. The put price should be close to the current price and have a premium close to the div amt and the dividend should be at least 1% plus greater than 0.20. The next day the stock will automatically drop by the div amt and more. Most cases the stock drops more than the dividend. Here you want to buy the stock then exercise the put. Check VZ and T. Investing is about win loss ratios and managing risk.

    Remember there are two ways to recieve money from a put you can exercise it or just sell it. In the event the stock does not drop below the dividend amt the selling of the put will amt to losing very little money.

    If you are in a losing situation then you have another choice you can setup a collar since the put already exists and hope for a move upwards and your downside will already be protected.

    If you do get the stock below the dividend amt you can buy and sell the stock as it moves up and down throughout the day then sell the put or exersize it.

  • Steve

    I just had a friend call about this very issue. He wanted to buy puts just prior to the ex-date. The stock was at 28.80 and with a month remaining, the put 25 stike options were $.70…the special dividend is $8. The stock could fall to $22 after ex, and those options could then be worth $3. Something for nothing? Always makes we wonder when it seems that easy :-o

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  • […] Dividend Capture Strategy | WhereDoesAllMyMoneyGo.comThe dividend capture strategy is fairly simple, but is not without its drawbacks. First let’s explain what it is. As you may know, there are many companies that … I once wrote an article about dividend capture strategy where I said that it is the illusion of getting something (dividend) for nothing.. […]