How to Do a Dividend Capture
Dividend capture is a stock market strategy to buy shares of a stock and hold the shares for a few days -- long enough to earn a dividend -- then sell the shares. The goal behind the strategy is to not own the stock while it moves up and down through the year, but only for the few days each quarter when the dividend is paid. The rest of the time the money can be used for other trading strategies or to do dividend capture on other stocks.
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Instructions
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Select a stock with a high dividend payout. Most pay dividends quarterly, so a stock with a current 6 percent yield will pay a dividend equal to about 1.5 percent of the share price each quarter. The dividenddetective.com website maintains a list of high yield stocks, many with dividend rates over 10 percent.
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Research the stock's dividend payment history on the company website in the "investor relations" section. You need the approximate date each quarter when the company declares a dividend, the expected dividend amount, payment date and the dividend record date.
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Sign up for news release email notices from the company website. Dividend announcements and record dates can vary from year to year and you need the exact dates for the upcoming dividend payment.
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Determine the ex-dividend date when you receive the announcement for the next dividend payment. The ex-dividend date is two business days before the dividend record date. You must buy the shares before the ex-dividend date to be a shareholder of record on the record date.
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Buy shares of the stock at least one day before the ex-dividend date. The number of days before can be determined by studying the share price history in the days before and after previous ex-dividend dates.
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Sell the shares when the share price has recovered to your purchase price or higher. On the ex-dividend date, the share price will start trading at the previous closing price less the dividend amount. If you sell the shares on the ex-dividend date you will earn zero profit. You must wait for the share price to recover. The dividend will be deposited in your brokerage account on the payment date.
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Tips & Warnings
Develop a list of stocks with high dividends and predictable price patterns around the ex-dividend date. From your research you can determine the best days to buy and sell the shares to not lose money on the share price and earn the dividend.
The dividend payment date will be a few days to several weeks after the record date. It is not necessary to own the shares until the dividend is paid. You only have to own the shares on the record date.
Use a brokerage margin account to lower the amount of money you must put up to buy shares. A margin account allows you to borrow up to half the cost of stock, allowing you to double your investment return from the dividends captured.
The danger of dividend capture is if the stock price declines on the ex-dividend date and does not recover to the price you paid for the shares. Historic share price research will help minimize the possibility of this outcome.
If you own shares of a stock for less than 60 days, the dividend received is taxed at your marginal rate rather than the lower tax rate for qualified dividends.
References
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