Dividend Harvesting Strategy | All You Need To Know

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The dividend harvesting strategy (or dividend capture strategy) involves buying shares before the ex-dividend date and selling them after that date to receive dividend payments. This strategy allows investors to receive dividends without holding shares long-term, but requires consideration of tax and transaction costs. To successfully implement the strategy, it is important to choose stocks with high dividend income and a stable payment history.

A dividend harvesting involves buying shares before the ex-dividend date and selling them immediately after that date to receive dividend payments. This strategy appeals to short-term traders and investors seeking dividend income without the need to hold shares long-term. It is designed for those who want to increase their investment income using regular dividend payments. This article discusses dividend harvesting strategy in detail and teaches you how to implement it for your own portfolio.

Basics of dividend capture strategy

The main goal of the dividend harvesting strategy is to obtain stable income in the form of dividend payments, as well as possible capital growth by increasing the value of shares. This strategy appeals to investors seeking lower risk and stable income. To successfully implement this strategy, it is important to understand the key dates associated with dividend payments.

Dividend harvesting timeline

Declaration date. The company announces the amount and date of dividend payment. This is an important point for investors, as it allows them to plan their actions.
Ex-dividend date. The date by which shares must be held to become eligible for dividends. After this date, shares are traded without the right to an upcoming dividend payment, which usually causes their price to decline.
Record date. The date on which the company records the list of shareholders entitled to receive dividends.
Payment date. The day on which the dividend is actually paid to shareholders. You do not need to own the shares on that date to receive the payment, just be on the list on the record date.

How to harvest dividends? Step-by-step instruction

Stock selection. Find stocks that have announced upcoming dividends.
Buying shares. Buy shares before the ex-dividend date.
Retention of shares. Hold shares until the ex-dividend date to qualify for dividends.
Sale of shares. Sell shares after the ex-dividend date to lock in profits.

Pros and cons of the dividend capture strategy

Sustainability. Companies that are able to pay stable and growing dividends usually have strong financials and stable businesses.
Simplicity. No in-depth knowledge of technical or fundamental analysis required. Though basic knowledge of critical events which may impact the results of this strategy is required.
Flexibility. Ability to regularly update your portfolio and use different stocks to capture dividends.

Transaction costs. High commissions for buying and selling shares can reduce overall profits. This is especially true for traders with small accounts.
Tax liability. Short-term dividends may be subject to higher taxes, reducing the overall return of the strategy.
Price fluctuation risks. The share price may change significantly after the ex-dividend date, which could result in losses if the share price falls by more than the dividend amount.

How to choose dividend stocks?

To successfully apply the Dividend Harvesting Strategy, you should choose companies whose shares bring stable and regular income to their owners. When choosing such companies, you should consider the following parameters:

Dividend yield. This is the ratio of annual dividend payments to the current stock price. A high dividend yield can be attractive, but it's also worth considering the sustainability and stability of the payout.
Payment history. Preference should be given to companies with a long history of regular and growing dividend payments. This indicates the financial stability and reliability of the company.
Dividend payment ratio. This indicator reflects the share of profits allocated to pay dividends. A ratio that is too high could indicate a risk of dividend cuts in the future, especially if the company is facing financial difficulties.
Financial condition of the company. Analyze the financial condition of the company to ensure its ability to continue paying dividends in the future. A strong balance sheet and stable earnings are good indicators of a company's financial strength.

Dividend harvesting strategy: the most attractive destinations and companies

Dividend aristocrats

Dividend aristocrats are S&P 500 companies that have increased their dividends for at least 25 consecutive years. These companies are often the basis for dividend portfolios and attract investors due to their stability and resilience.

Examples:

Coca-Cola (KO). Increases dividends for more than 50 years in a row.
Procter & Gamble (PG). More than 60 years of dividend increases.
Johnson & Johnson (JNJ). Increases dividends for more than 50 consecutive years.

Companies with constant dividend growth

This strategy focuses on companies that not only pay dividends, but also increase them regularly. Unlike companies with high current dividend yields, companies with high dividend growth often reinvest a significant portion of their earnings back into the business, fueling long-term growth.

Examples:

Microsoft (MSFT). Stable dividend increase policy.
Apple (AAPL). Regular dividend increases along with business growth.

Income funds

Income funds (mutual trusts and ETFs) focus on dividend stocks and can provide diversification and reduce the risk associated with picking individual stocks.

Examples:

Vanguard Dividend Growth Fund (VDIGX). A fund that invests in companies with sustainable and growing dividends.
SPDR S&P Dividend ETF (SDY). An ETF that tracks the Dividend Aristocrats of the S&P 500.

Dividend strategy by sector

This strategy involves diversifying your portfolio by investing in companies from different sectors of the economy. Some sectors are traditionally known for their high and stable dividend payouts.

Examples:

Energy sector. Companies like ExxonMobil (XOM) and Chevron (CVX) are known for their high dividends.
Financial sector. Banks and insurance companies often offer attractive dividends, such as JPMorgan Chase (JPM) and MetLife (MET).

Asset classes with high dividend yield

A high dividend yield may not always indicate a company's financial health, but careful analysis and selection can lead to high returns.

Examples:

REITs (Real Estate Investment Trusts). Companies that invest in real estate often pay high dividends, such as Realty Income (O).
MLPs (Master Limited Partnerships). Energy and infrastructure companies like Enterprise Products Partners (EPD) are known for their high dividends.

Accounting for taxes and expenses

Tax consequences. Dividends may be taxed as ordinary income if the shares were held for less than 60 days. To minimize tax costs, you can use tax-qualified accounts such as an IRA or 401(k), where dividends can be reinvested without immediate taxation. It is also worth considering tax optimization opportunities, such as using losses to reduce the tax base.
Transaction costs. High transaction fees can significantly reduce the profitability of a dividend collection strategy. It is important to take these costs into account when planning and choose brokers with low commissions. Brokers often offer discounts for active traders, which can significantly reduce overall costs.

To implement the dividend harvesting strategy, you need to buy shares of the companies you select. And to do this, you need to choose a reliable broker that provides access to trading in shares of companies that regularly and fully pay dividends. The key criteria when choosing a broker are low commissions, access to a wide range of markets, the convenience of the platform, the quality of analytical tools, as well as the reputation and reliability of the company. And, of course, access to trading dividend stocks.

Best stock brokers
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eOption		$3 per trade	$3 per trade	Tier-1	Open an account Via eOption's secure website.
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Revolut	0,15-1	Standard, Plus, Premium, and Metal Plans: 0.25% of the order amount. Ultra Plan: 0.12% of the order amount.	£1.00 in the UK, €1.00 in the Eurozone	Tier-1	Study review
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Pay attention to market volatility in the periods before and after the ex-dividend date

Having implemented multiple investment strategies, I would like to emphasize the importance of understanding not only the theoretical aspects, but also the practical aspects of dividend collection strategy. This strategy may seem simple at first glance, but its successful implementation requires deep market understanding and discipline. First of all, it is necessary to take into account market volatility in the periods before and after the ex-dividend date. Often investors ignore this aspect, which can lead to unexpected losses.

One of the keys is choosing the right stocks. Not all stocks are suitable for a dividend strategy. I recommend paying attention to companies with a strong financial position and a history of stable dividend payments. It is also useful to use technical analysis tools to determine the optimal moments to enter and exit a position. For example, volume indicators and moving averages can help identify potential price turning points.

It's also worth keeping the tax implications in mind. Dividends received as part of a short-term strategy are taxed at a higher rate than long-term investments. Investors should consider using tax-advantaged accounts, such as IRAs or retirement accounts, to minimize their tax burden. It is also important to consider transaction costs, which can significantly reduce the profitability of a strategy. Choosing a broker with low commissions and using automated trading systems can help optimize costs and improve the overall effectiveness of the strategy.

Conclusion

The dividend collection strategy offers investors the opportunity to receive regular income, provided that they select stocks wisely and take into account all associated costs. Despite its apparent simplicity, successful implementation of this strategy requires careful analysis and discipline.

For maximum efficiency, it is important to choose shares of companies with a stable history of dividend payments and a stable financial condition. You also need to consider tax liabilities and transaction costs, which can significantly reduce the profitability of the strategy. Ultimately, the dividend levy can be an effective tool for increasing portfolio returns if it is approached carefully and strategically.

FAQs

How does the macroeconomic situation affect the effectiveness of the dividend collection strategy?

The macroeconomic situation can significantly influence the effectiveness of a dividend collection strategy. During periods of economic uncertainty or recession, companies may reduce or eliminate dividend payments, which reduces the profitability of the strategy. Also, market volatility during such periods can increase the risks associated with changes in stock prices.

What role does the choice of broker play in the dividend collection strategy?

Choosing a broker plays a key role in your dividend collection strategy. Brokers with low commissions and fast order execution can significantly increase the overall profitability of a strategy by reducing transaction costs. Also important are the tools and platforms provided by the broker, which can help in market analysis and optimization of trades.

What alternative strategies are there to generate regular income from investments other than dividend collection?

In addition to dividend collection, investors may consider strategies such as dividend growth (investing in companies that regularly increase their dividend payouts), high coupon bonds, and real estate for rental income. These strategies can offer stable and regular income while diversifying your investment portfolio.

What are the risks associated with using a dividend collection strategy?

Risks of a dividend strategy include the possibility that the share price will decline after the ex-dividend date, which could result in losses. There are also risks associated with changes in tax laws that could affect net dividend income. Finally, high transaction costs can significantly reduce the overall return of a strategy.

Team that worked on the article

Rinat Gismatullin is an entrepreneur and a business expert with 9 years of experience in trading. He focuses on long-term investing, but also uses intraday trading. He is a private consultant on investing in digital assets and personal finance. Rinat holds two degrees in Economy and Linguistics.

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Chinmay Soni is a financial analyst with more than 5 years of experience in working with stocks, Forex, derivatives, and other assets. As a founder of a boutique research firm and an active researcher, he covers various industries and fields, providing insights backed by statistical data. He is also an educator in the field of finance and technology.

As an author for Traders Union, he contributes his deep analytical insights on various topics, taking into account various aspects.

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).

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