Dividend Capturing Techniques

Some investors try to capture dividends by buying and selling dividend stocks at just the right times.

Dividend capturing is a strategy investors use to maximize the return on an investment through the use of timing. The essence of the trade is to purchase shares in a corporation with an upcoming dividend, collect the dividend and then sell the shares at a profit. As with any trading strategy, dividend capturing involves risk. Therefore, to minimize the risk and maximize potential returns, an investor should pay close attention to dividend dates, stock prices and tax regulations.

Declaration Date

The declaration date is the date on which the corporation announces a dividend payment. Some corporations announce such payments via press release. Other companies maintain a consistent dividend payment -- annually, bi-annually or quarterly -- which makes it easier for an investor to capture the dividend payment. This date is important because it alerts the investor to buy the stock. The investor may decide to purchase the stock on the declaration date in order to ensure ownership of the shares before the ex-dividend date.

Ex-Dividend Date

The ex-dividend date is the date on which an investor is no longer eligible to receive a company’s dividend after purchasing the stock. In other words, the stock must be purchased before the ex-dividend date in order to receive the dividend. Thus, it is in an investor’s best interest to purchase the shares before the corporation’s ex-dividend date. For those investors that are on record as shareholders by the ex-dividend date, the corporation issues a dividend on the pay date.

Risks

Although dividend capture has the appearance of a simple transaction, there are several risks which necessitate strategy. The first risk is the real possibility that the stock price declines between the declaration date and the ex-dividend date. If an investor decides to hold his investment during this period, possibly more than 60 days, he will risk big in trying to capture small. Another risk is that the stock price declines by more than the dividend amount on the ex-dividend date and the investment is lost.

Strategies

Some investors aim to maximize returns on the stock price, the dividend and the dividend tax rate. Therefore a strategy involving holding shares longer (61 days) than an investor intends may not be in the best interest for that particular investor. Conversely, an investor may decide to sell her stock short (or a similarly situated stock, industry or fund) to hedge any possible loss and balance risk.

Other investors may invest in stocks with limited risk, such as large-cap stocks. Employing the latter strategy enables the investor to reap the return of the dividend payment and sell the shares to avoid market volatility. Since dividend capturing is a short-term strategy, it is highly susceptible to a volatile market's price fluctuations.

References

• Qualified Dividends; Internal Revenue Service.
• Dividend Capture Using Covered Calls; The Options Guide; 2009.
• Dividend Mania; Daniel Fisher; Forbes; December 2007.