Dividend Capture Strategy
The dividend capture strategy is fairly simple, but is not without its drawbacks. First let’s explain what it is. As you may know, there are many companies that pay dividends to stockholders. If you own shares in a stock on the day before the stock starts trading “ex-dividend” you are entitled to receive the dividends owed on that stock, even if you sell it once it starts trading “ex-dividend”. If you buy the shares on, or after the ex-dividend date, you do not get to collect the next dividend payment.
So the dividend capture strategy simply entails looking up the ex-dividend dates and purchasing stocks of various dividend-paying companies before the ex-dividend day and selling your holding once they start trading ex-dividend. Your goal is then to find another stock with a quickly approaching ex-dividend date, wash, rinse and repeat. Instead of getting four quarterly dividend payments, you might get eight quarterly dividend payments – or another way of saying this is that if you could find two stocks (as an example) that had different ex-dividend schedules and each had a 4% yield, your portfolio could potentially get an 8% yield by switching between these stocks on a regular basis.
Sounds great, doesn’t it?
Hold the phone. On thing about stocks that pay dividends is that there is a slight run up in price (on average) approaching the ex-dividend date and then a drop in price (on average) on the ex-dividend date approximately equivalent to the dividend per share amount. So you could be paying a premium to purchase the stock and selling at a lower price after the ex-dividend date. If the dividend payment only makes up the capital loss, what was the point?
Daily fluctuations can mask the run-up and drop in the share price, but over time it averages out. Many funds that have tried to run a dividend capture rotation strategy have not only failed to live up to the hype, they were especially clobbered in 2008 due the high allocation to financials.
Today’s post was brought to you by the letter Q, and the number 4. (God I miss watching Sesame Street!)
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Comment by Canadian Capitalist on 26 February 2009:
Congratulations on the mention in the National Post and Ottawa Citizen today. Wish I had more cash to buy at these levels
Comment by Susan on 26 February 2009:
Great article! I’ve heard of people trading for dividends and often wondered how it works.
Comment by gene on 26 February 2009:
I read of a similar strategy in Canadian Moneysaver, where the investor would buy a dividend payer about half way between dividend payments. He would then enjoy more of that run-up pre-dividend that you mentioned. I don’t recall his sell point, but it was likely on or just following the ex-dividend date.
Comment by Patrick on 26 February 2009:
One word: arbitrage.
I can’t believe anyone would actually take this strategy seriously.
Comment by Dividend Growth Investor on 6 March 2009:
I once wrote an article about dividend capture strategy where I said that it is the illusion of getting something (dividend) for nothing..
Comment by FearLES on 9 March 2009:
It can actually work not too bad if you have a TFSA and a discount brokerage and you are buying a stock you don’t mind hanging on to if you can’t break even on the stock buying/selling.
Comment by Patrick on 10 March 2009:
@FearLES: I don’t buy it. Arbitrage will make the price of the share drop by exactly the dividend amount (on average) on the ex-dividend date, because it’s worth exactly that much less on that day. Dividend capture will work only to the extent that arbitrage doesn’t work, i.e. to the extent of market inefficiencies.
Comment by FearLES on 11 March 2009:
right now the market definitely isn’t efficient.
Comment by RM on 22 September 2009:
What about this?
In a bullish market, choose an undervalued stock (low P/E) with a very high dividend (6-15%)… purchase about a month or two prior to the ex-div date.
The stock should run-up with the anticipation of the dividend.
Sell prior to the ex-div date, capture any run-up profit and avoid the tax on the dividend.
Not saying this is going to happen all the time, but it makes sense right?
Comment by Patrick on 22 September 2009:
No, it doesn’t make sense. Someone must be on the other side of those trades. What moron will sell it to you at the low price, then buy it at the higher price?
Comment by Patrick on 23 September 2009:
@RM – perhaps I owe you an apology. Your argument is more subtle than I realized, and is based on the difference in taxation between dividends and capital gains. I still believe arbitrage will eat any profit you hope to make, but the point can’t be made using the “what moron” argument I used in my last reply.
Comment by Perry Brown on 2 October 2009:
Is it true that the reason a stock price enjoys a runup in price, the days before an ex-dividend day, are mostly because of funds and institutional investors purchasing the stocks for their ” dividend capture portfolios” and then the stock price falls later as they sell the stock to move their money into another dividend play. If so, anyone know of a stock forcaster program that tracks stocks that typicaly do not move in price surrounding their dividend payments?
Comment by TOM on 13 October 2009:
THE KEY IS TO SELL THE DAY BEFORE THE EX-DATE (EOD). THE LARGE MAJORITY OF THE TIME, YOU’LL STILL RECEIVE THE DIVIDEND AND YOU GET THE INCREASE IN SHARE PRICE.