What is Dividend Capture Strategy? How to Use It?

“Is it a good idea to buy shares just before the ex-dividend date and then sell right after pocketing the dividend?”, asked one of our readers. Well, earning in the share market is all about finding a good strategy. Once you find a strategy that works according to your aspirations, you just need to stick to it. There are a whole lot of strategies suitable for investors and traders of all kinds. In this write-up, we’re discussing ‘dividend capture’, one of the popular investment strategies. Read on to know if this strategy suits your investment style.

What is Dividend Capture?

Dividend capture is a timing-oriented investment strategy that is aimed at ‘capturing’ the announced dividend and not just selling stocks at profit. An investor with a dividend capture strategy focuses on buying dividend-paying stocks just before the ex-dividend date or reinvestment date so as to become eligible for getting the announced dividend. The buyer then sells the share on or after the ex-dividend date.

The focus of the investors employing dividend capture strategy is to earn quick returns through dividends along with the profit accrued after selling the stocks at higher than the purchase price. This strategy is applied to stocks that pay a sizeable amount of dividends and have high trading volumes. The dividend capture strategy works because one does not need to be a long-term holder of stocks to get a dividend. Buying a stock just a day prior to the ex-dividend date makes one eligible to receive the dividend and then the person can sell the stock on or after the ex-date and invest the amount in some other stocks.

One of the most appealing features of dividend capture strategy is its simplicity. The investor does not need to learn any complex fundamental or technical analysis. The only need is to keep oneself updated with the dividend declaration of companies listed on the stock market where you trade. This information is freely and easily available on various news portals and websites dedicated to stock market updates.

Dividend Capture Strategy: Terms You Need to Know

Declaration Date – This is the day on which the board of directors announces the dividend payment. Any investor intending to capture dividends must keep an eye on declaration dates in order to know every important detail. Without understanding these details, a proper strategy cannot be made for buying a share for capturing the announced dividend.

Ex-Dividend Date – This is the cut-off date for being eligible to receive the dividend on a certain stock. This is the most important date to remember, as investors have to buy shares before this date to be eligible for a dividend. This is the date when securities trade without dividend. If the price is suitable, an investor can also sell their stocks on this date without affecting their dividend eligibility status.

Date of Record – This is the date on which the company records the name of the shareholders who are eligible for receiving a dividend.

Pay Date – This is the date on which the company pays a dividend to the eligible shareholders.

Problem with Dividend Capture Strategy

Timing is everything in the dividend capture strategy. Typically the market price of the share falls right on ex-dividend date. This fall is more or less equal to the dividend paid by the company. As a result, you do not earn or lose anything! Let’s understand it with an example.

Let’s assume the current market price of a company is $100 and the company announces a dividend of $8 per share.

To capture this share, you buy 100 shares before the dividend date.

You pay $10,000 for 100 shares and get $800 as dividend.

On ex-dividend date, when the market will open, company’s share will open at $92 per share (after adjusting $8 dividend)

So now what you have is $9,200 worth of shares and $800 in cash — which is equal to $10,000 — exactly what you had paid for the shares.

So, the big question is, how do people make money with dividend capture strategy?

If the stock is fundamentally strong and popular among investors, it may bounce back and regain the value it had lost after dividend adjustment. Investors who are looking to accumulate this stock will tend to buy it at the reduced price — pushing the price back up. This is why high volume stocks should be chosen for this strategy to work.

Points to Consider Before Using Dividend Capture Strategy

The dividend strategy may seem to be a sure-win strategy as it gives dividends as well as share trading profit in the very short term. But, practically, everything about the dividend capture strategy is not perfect. If you are fascinated about the dividend capture strategy, you must consider the following points before adopting it as your investment strategy.

• The earnings from the dividend capture strategy may not provide tax advantage. The received dividend may be taxed in the hands of the investor at the ordinary tax rate. Dividend received by people who hold the investment for a long is treated as a long-term gain and hence that is more tax efficient.
• The strategy may not be very beneficial if transaction cost is not accounted for. There are so many companies that one or the other major company would pay a dividend every day. This means that the investor with a dividend capture strategy needs to be very active in buying and selling stocks. The more actively one transacts in the share market, the greater will be transaction commissions. If not planned well, commissions and taxes can eat up all the earned profit.
• The strategy may not be very effective in downtrends. The dividend capture strategy is effective when the investor can earn a profit on the sale of shares too. When the market is in strong uptrend investors can earn dividends as well as profit on selling the share. But, in case of a downtrend or sideways market shift the investor might need to wait longer for the share price to be favorable for selling.
• Dividends are paid out quarterly, annually, and sometimes monthly. Paying attention to stocks with large annual dividend payouts is the best strategy for capturing dividend income and profit. You may lose significantly if you go behind small dividends and stocks that pay monthly or quarterly dividends.
• The viability of this strategy has come into question due to recent trends in the market where stocks decline in value immediately after the ex-date. This decline is typically equal to the value of the announced dividend. The efficiency of the market in gaining equilibrium seems to be working against the dividend capture strategy. So, you must research and find stocks that do not follow this trend.

Final Words

The dividend capture strategy is simple and easy to apply. But, it is not always effective. If it was so effective, some automation system must have come by now to exploit this strategy. However, that is not the case. Like all other investment strategies, dividend capture too needs discipline, dedication, and patience to be fruitful. Being a short-term trade strategy it needs the investor to be active. If you are a passive investor, dividend capture is not the strategy for you.