Is the Dividend Capture Strategy Right For You?

The Dividend Capture strategy involves buying a stock before its dividend distribution and then selling it shortly after.

The goal is to harvest dividends by jumping from stock to stock.

Is it really that simple?

Not really.

There are a couple of issues that must be overcome which makes it difficult for the small investor to be successful.

But it's not impossible. And I'll provide a few ideas and resources to help make this strategy profitable.

First, let's talk about the issues.

Timing and Stock Price Variation

You can't simply buy shares in a dividend paying stock immediately prior to the dividend distribution.

The company needs to know which shareholders to pay so they establish an ex-dividend date prior to the dividend distribution.

You must buy the stock at least one day prior to the ex-dividend date to receive the dividend.

Let's assume you bought a stock prior to the ex-dividend date, sell the stock right after the ex-dividend date, and are paid dividends on the distribution date.

Did you gain anything? The answer is maybe.

The stock was re-priced the instant the dividend was paid to account for the reduction of cash on the balance sheet. The amount of stock price reduction was equal to the dividend distribution per share.

But this is the real world. So the stock price could have also went up or down an additional amount during your holding period due to other factors.

There's also the issue of taxes.

The Dividend Capture strategy results in short-term capital gains which have less favorable tax treatment compared to long-term capital gains for taxable accounts.

This is not an issue for tax sheltered accounts.

Furthermore, the short duration of your holding means your dividend will probably not be considered a qualified dividend, again leaving you in a less favorable tax position.

Improving Your Chances

There are investors who have created strategies to overcome the problems with this strategy.

For example, you can buy a stock and an equivalent number of at-the-money or in-the-money put options to counteract the drop in price.

Or, you can buy a stock and sell a covered call option.

Click on the Options links on the navigation menu to learn more about using options.

I have not employed this strategy and am not an expert on the topic, but I am skeptical that it works.

Please leave a comment below telling me if you have successfully used Dividend Capture and I'll put your comments on this page to allow other readers learn.

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