The Pros And Cons Of Dividend Capture
Here's a step-by-step guide to implementing the dividend capture strategy:
Identify Dividend-Paying Stocks
Track Dividend Announcement Dates
Determine Ex-Dividend Dates
Purchase Stocks Before Ex-Dividend Dates
Hold Stocks Until Dividend Payment
Evaluate Selling After Dividend Payment
The dividend capture strategy is a short-term trading technique that involves investors or traders buying a stock right before the company issues dividend payments to shareholders, and then selling after receiving dividends. Although the strategy might seem foolproof, it has its drawbacks.
In this article, we look at what dividend capture strategy is, how the dividend capture strategy works, how to choose stocks for the dividend capture strategy, and the pros and cons of using the dividend capture strategy.
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What Is Dividend Capture?
Dividend capture is the trading technique of investing in a stock shortly before the date when shareholders are put on record as earning a dividend payment. Traders aim to enter a position shortly before dividends are calculated and sell the stock at the same price as they bought it for, with dividends paid out as profit.
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How to do dividend harvesting?
Dividend harvesting, also called dividend capture, involves traders following a calendar of dividend payments from companies and investing in specific companies on the right date to ensure they receive dividends. Traders enter a trade before the ex-dividend date so that they are on record to receive dividend payments, then exit the trade on the record day, or when they are satisfied with their profits. They receive the dividend payment roughly one month later.
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Is dividend capture a good strategy?
There are some advantages to it. It’s a source of steady and predictable income for short-term investors. It’s also incredibly simple to put into practice. However, it usually provides smaller gains than most trading strategies or long-term investments.
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How much can you make from dividend capture?
Using the dividend capture strategy involves transaction costs, and stock prices tend to dip on ex-dividend day, so depending on when traders enter a trade they can expect to make 1% to 2% profit per trade.
How does dividend capture work?
Dividends are payments that companies distribute to shareholders, usually every financial quarter, often in the form of cash or stock reinvestments. The payment amounts and dates are determined by the board of directors and are based on how well the company is performing, as well as its financial goals. Anybody holding any number of shares in that company on the payout date will receive a dividend payment worth a certain percentage of the company’s stocks.
The dividend capture strategy is a tactic employed by some traders to try and ‘capture’ that dividend payment by buying shares in a dividend-paying company just before they are distributed. The goal as a trader is to sell the shares for as much as you bought them for (or more), while adding the dividend payments to your overall capital, resulting in a profit. This can prove difficult, as dividend payments can cause a stock’s price to drop immediately afterward.
How does dividend capture wor
Difficulties can also arise when trying to time an investment in order to capture the dividend payments. Traders employing the dividend capture strategy must buy shares in the company before the ex-dividend date or they won’t be able to collect dividend payments.
What is an ex-dividend date?
One of the most difficult aspects of implementing the dividend capture strategy is timing your investments. There are three key dates that come into play here.
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Declaration Date: This is the date when the company’s board of directors sets the amount that will be paid out on the next ex-dividend date. They also set the record date, ex-dividend date, and It tends to be several weeks in advance of the dividend payment date.
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Record Date: The record date is when a record is established to determine the shareholders who will receive payments later on, when the day of dividend payments arrives. The company checks its records and identifies the list of shareholders to receive dividends, based on trades made up to the ex-dividend date. The record date is set on the declaration day.
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Ex-Dividend Date: This is the day when the dividend is removed from the stock, hence the name “ex-dividend” (without dividend). Investors who buy shares on this date or afterward will not be eligible for dividends. After the ex-dividend day, the stock will be traded at a price minus the dividend payment. This date is usually the last business date before the record date. For example, if the record date was on Monday 27th November, the ex-dividend date would be Friday 24th November. The ex-dividend day is after the record day because it takes a business day for the transaction to be settled.
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Payment Date: This is the day that the actual dividend payments are issued. It usually occurs roughly one month after the record date.
In order to maximize your chances of making a profit, it’s important to time when you enter your trade according to these important dates. Because the stock’s value has the dividend subtracted from it on the ex-dividend day, profits may be non-existent or minimal if you enter a position just beforehand and then sell immediately after.
Best stock brokers
How to choose stocks for dividend capture
When choosing the best stocks to trade in order to maximize the chance of success in applying the dividend capture strategy, there are several factors to consider. The main aspect you’ll be looking at is the dividends, so assess these characteristics:
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Dividend Yield: Dividend yield is the annual dividend income expressed as a percentage of the stock's current market price. It indicates the return an investor can expect to receive through dividends. A higher dividend yield is generally desirable for dividend capture. However, an exceptionally high yield may signal potential risks, so it's crucial to assess the sustainability of the dividend.
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Dividend Growth: Dividend growth refers to the company’s historical trend of increasing its dividend payments over time. Consistent dividend growth is often indicative of a company's financial health and the management’s confidence to be able to consistently grow. Look for companies with a track record of stable and growing dividends. Companies with a history of increasing dividends may be more attractive for the dividend capture strategy, as they demonstrate a commitment to returning value to shareholders.
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Dividend Safety: Dividend safety assesses the likelihood that a company will be able to maintain its dividend payments in the future. It involves evaluating the company's financial health, earnings stability, and the proportion of earnings paid out as dividends. Although ensuring a company can sustain future dividend payments may be important for long-term investments, it’s not too important when using the dividend capture strategy.
Let’s take a look at some of the advantages and disadvantages of using the dividend capture strategy.
👍 Pros
• Simplicity: To be able to take advantage of the dividend capture strategy, you don’t need to conduct much market research or understand technical analysis or fundamental analysis. The core information that must be taken into account is the important calendar dates, such as ex-dividend and payment dates, as well as the payment amounts and dividend information.
• Income: The dividend capture strategy aims to generate income through capturing dividend payments, which provides a consistent source of cash flow for traders.
• Short-Term: When using the dividend capture strategy, traders only need to hold positions in a stock for one day. This means that no long-term capital investment is required, which makes it an easy and effective strategy for generating small returns for day or swing traders.
• Predictability: Unlike most forms of short-term trading, which can be unpredictable and volatile, the dividend capture strategy is relatively formulaic. The company divulges exactly how much a dividend payment will be worth on declaration day and says when the payment will be made, leading to an overall rather stress-free endeavor for a trader.
• Market Independence: Because dividend payments are not tied to any broader market trends, the dividend capture strategy can be implemented independently, as it is focused on specific stocks and their dividend rates.
👎 Cons
• Taxes: If stocks are not held for 60 days or more, then dividends are labeled as “unqualified” and will be taxed at the standard income rate. Regardless of what your income is, the standard rate is always going to be less preferable than the usual capital gains tax.
• Less Profit: Using the dividend capture strategy can be less profitable in the long run than long-term investing in dividend stocks. This is particularly true when you consider the drop in value that tends to happen on ex-dividend day. Investing in a stock for months or years and profiting from the company’s growth may yield higher returns than investing for a single day to capture dividends.
• Transaction Costs: Frequent buying and selling of stocks can lead to increased transaction costs, which may erode the overall potential returns from utilizing the strategy.
• Risk of Loss: While the focus of the strategy is on capturing dividends, traders should be aware of the potential for losses, especially if stock prices decline or if the strategy is not executed very precisely.
Conclusion
The dividend capture strategy is a trading technique used to profit from dividend payments issued to shareholders of companies. Traders aim to enter a trade after the company’s declaration date, and exit on or after the ex-dividend date, so that they are on company records when they issue dividend payments to shareholders.
Glossary for novice traders
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1
Broker
A broker is a legal entity or individual that performs as an intermediary when making trades in the financial markets. Private investors cannot trade without a broker, since only brokers can execute trades on the exchanges.
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2
Dividend Capture Strategy
The dividend capture strategy is a trading technique used to profit from dividend payments issued to shareholders of companies.
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3
Trading
Trading involves the act of buying and selling financial assets like stocks, currencies, or commodities with the intention of profiting from market price fluctuations. Traders employ various strategies, analysis techniques, and risk management practices to make informed decisions and optimize their chances of success in the financial markets.
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Investor
An investor is an individual, who invests money in an asset with the expectation that its value would appreciate in the future. The asset can be anything, including a bond, debenture, mutual fund, equity, gold, silver, exchange-traded funds (ETFs), and real-estate property.
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Yield
Yield refers to the earnings or income derived from an investment. It mirrors the returns generated by owning assets such as stocks, bonds, or other financial instruments.
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Team that worked on the article
Jason Law is a freelance writer and journalist and a Traders Union website contributor. While his main areas of expertise are currently finance and investing, he’s also a generalist writer covering news, current events, and travel.
Jason’s experience includes being an editor for South24 News and writing for the Vietnam Times newspaper. He is also an avid investor and an active stock and cryptocurrency trader with several years of experience.
Dr. BJ Johnson is a PhD in English Language and an editor with over 15 years of experience. He earned his degree in English Language in the U.S and the UK. In 2020, Dr. Johnson joined the Traders Union team. Since then, he has created over 100 exclusive articles and edited over 300 articles of other authors.
Mirjan Hipolito is a journalist and news editor at Traders Union. She is an expert crypto writer with five years of experience in the financial markets. Her specialties are daily market news, price predictions, and Initial Coin Offerings (ICO).