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Dividend Capture Strategy: How It Works

dividend capture strategy

A dividend capture strategy involves purchasing stocks before their ex-dividend date, then holding onto them just long enough to receive a dividend payout. This approach is also called buying the dividend. Using a dividend capture strategy could be profitable if you’re investing in stocks that pay above-average dividends. But it’s not for beginners and there are some potential risks involved. If you’re interested in trying to use a dividend capture strategy, it may be a good idea to talk to a financial advisor first. Try using SmartAsset’s free advisor matching tool to find advisors that serve your area today.

Dividend Basics

To understand dividend capture strategy, it’s important to have some background on dividends and how they work. A dividend represents a percentage of a company’s retained earnings that are paid out to shareholders. Not all companies pay out dividends. Growth stocks, for example, tend to reinvest profits into expansion rather than paying them out to investors.

Dividend payouts aren’t the same across the board. Payouts can increase or decrease, depending on the company’s profitability. A handful of companies, known as Dividend Aristocrats and Dividend Kings, have lengthy track records of consistently increasing dividend payouts year-over-year but they’re the exception, rather than the rule.

Dividend Dates and Dividend Payouts

Companies don’t pay out dividends randomly; instead, they follow a schedule for making these payments to investors. If you plan to attempt a dividend capture strategy, then it’s important to understand how these dates work.

Specifically, the key dividend dates to know are:

  • Declaration date. This is the date when a dividend payment is announced. No money actually changes hands yet. Think of the declaration date as a “heads up” to investors.
  • Ex-dividend date. This date marks the first day that any new investors in the stock will not receive the dividend payment. So, if you own the stock the day before the ex-dividend date you’ll get the dividend payout. But if you wait until the ex-dividend date to buy shares or the day after the ex-dividend date, then you wouldn’t be eligible for that round of dividend payments.
  • Record date. This is the date after which any new investors in the stock would not qualify for a dividend payout that’s already pending. And if you held shares in the company, then sold them the day before the record date you won’t receive any dividend payout either.
  • Payment date. This is the date that dividends are actually paid to investors. Depending on the company’s payout structure, you might receive a check in the mail or an electronic payment.

If you receive a dividend payment, it’s up to you to decide what to do with it. You could deposit the money into your bank account, for example, if you’re relying on dividends for current income. Or you could reinvest your dividends to buy additional shares or purchase other investments. Some companies allow you to automatically reinvest dividends through a dividend reinvestment plan or DRIP.

How a Dividend Capture Strategy Works

dividend capture strategy

A dividend capture strategy involves purchasing a stock prior to its ex-dividend date, then selling it later. Remember, if you own a stock on its ex-dividend date then you’re entitled to receive the dividend that’s set to be paid out. It doesn’t matter if you sell the stock shortly afterward. So what’s the purpose of capturing dividends this way? Simply that you can pocket a dividend payout without having to hold on to the stock long-term. If you anticipate that a company is about to make a large dividend payment to its shareholders, you could buy shares just before the ex-dividend date.

Once the dividend is paid, you could sell those shares. If the stock’s price moves up between the time you purchased shares and the time you sell, then you could reap an additional benefit from a dividend capture strategy in the form of capital gains.

Is a Dividend Capture Strategy Profitable?

A dividend capture strategy is not foolproof. Effectively, what you’re doing is trying to time the market in order to maximize dividend payouts. One problematic aspect of buying the dividend is that it can push share prices up prior to the ex-dividend date. Prices then fall on the ex-dividend date, usually in proportion to the amount of the dividend that’s being paid out.

This can create an illusion of profitability if you’re selling the shares you purchased later for less than what you paid for them. Even a price difference of $0.25 or $0.50 a share can make a difference in your total net profit from capturing dividends. Moreover, it’s possible that increased market volatility could result in the stock’s price falling even further than the expected dividend payout, shrinking your profit margins even further.

It’s also important to consider the tax implications of dividend capture. In order for you to receive favorable tax treatment for dividends, i.e. at the lower long-term capital gains tax rate, you have to hold the stock for at least 60 days in the 121-day window that starts before the ex-dividend date. Otherwise, you’re going to end up paying the short-term capital gains tax rate on dividends, which is equivalent to your ordinary income tax rate.

How to Execute a Dividend Capture Strategy

The first step in buying the dividend is identifying which stocks to purchase. This may involve a little research online to determine which companies pay dividends and have upcoming dividend payouts. Unlike investing in dividends for income, you may be less concerned about the company’s fundamentals and more focused on the amount of the dividend to be paid.

The next step is to purchase shares of the stock prior to the ex-dividend date. This is arguably the most important thing to do when capturing dividends. If you wait until the ex-dividend date to buy shares, then you wouldn’t be eligible to receive the dividend; the seller of those shares would.

The final step is determining when to sell the shares you purchased once the dividend is paid out. This is where capturing the dividend can get tricky because it’s important to time your exit correctly in order to maximize profits. Looking at the stock’s historical pricing trends can give you an idea of how much prices might fluctuate before and after the dividend is paid.

Bottom Line

dividend capture strategy

A dividend capture strategy could put easy money in your pocket but it’s not risk-free. You have to consider how price movements might affect your total profit, as well as what you might owe in taxes on those gains. Choosing a buy-and-hold strategy might work better if you want to collect dividends consistently without having to worry about trying to time the market.

Tips for Investing

  • Consider talking to your financial advisor about whether a dividend capture strategy is something you should try. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • If you’re investing for dividends regularly, it’s important to consider how to put those dividends to work. A dividend reinvestment plan can make it easier to increase your position in a particular stock while purchasing additional shares free of commission fees. If you invest in a stock that doesn’t offer a DRIP, you could still use dividends to purchase additional shares yourself through your online brokerage account.

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