The dividend capture strategy is a fairly simple technique where you buy a stock just
in time to receive its dividend distribution.
After locking in that dividend, you then sell the stock and move onto another stock with
an upcoming dividend.
In theory, this strategy lets you collect dividend payouts practically everyday, as
long as there’s stocks paying them, which sounds pretty good right?
That’s exactly why we’re taking a closer look at this approach today.
In this video, I’ll give you a detailed explanation of the dividend capture strategy
and exactly how to execute it.
Then, we’re going to take a look at some numbers and data to figure out if this is
a worthwhile strategy in practice.
Finally, we’ll wrap things up with some dividend capture tips to help you maximize
your earnings from this strategy if you choose to give it a try.
So if you’re ready to start collecting some crazy dividends, stay tuned.
Dividend Capture Strategy Explained So the dividend capture strategy might be
one of the most simple investing strategies there is.
You just have to buy a stock in time to capture the dividend payout.
Unlike other strategies, which often require some level of fundamental analysis or in-depth
research, you can pull-off the dividend capture strategy with very little legwork.
You just need to have a good understanding of one thing, and that is the ex-dividend
date.
The ex-dividend date is simply the date at which time owning the stock no longer makes
you eligible to receive a dividend.
In other words, you have to own the dividend the day BEFORE the ex-dividend date to secure
your dividend payout.
So here is a simple timeline of how the dividend capture strategy could work.
First, a company will announce its dividend.
They’ll announce the dividend amount, the ex dividend date and the date at which they
plan on distributing the dividend.
This declaration of a dividend typically happens at least a few weeks before the ex-dividend
date.
So, once a dividend is declared, you have until the ex-dividend date to purchase that
stock and become eligible for their dividend.
The most important part is that you own the dividend at market close the day before the
ex-dividend date.
This is because the day before the ex-dividend date is the day that the company will make
a record of its shareholders, and these shareholders are the ones who receive the dividends.
So keep this in mind - if you buy a stock, and sell on the day before the ex-dividend
date or anytime earlier, you will not get the dividend!
You have to hold onto that stock until the ex-dividend date.
After this point you have locked in your dividend, so you are free to sell the share on the ex-dividend
date, or anytime after.
So to return to our sample timeline, a company announces a dividend, and you have a few weeks
to purchase that stock.
But, you have to make sure you are holding the stock before the ex-dividend date.
At market close on this day, the company will take note of its shareholders for dividend
distributions.
Starting on the ex-dividend date, you can no longer secure that previously announced
dividend.
Since your holdings were recorded the day before, you can sell your stock starting on
this day and still expect to receive the dividend on the announced pay-out date.
And that’s really all there is to it.
There are literally hundreds of websites out there that you can use to find stocks with
upcoming dividends, you just need to find a dividend ex-date calendar and plan your
stock purchases accordingly.
I did a little bit of searching and came across one I like at benzinga.com - it has a pretty
clean and thorough list of the dividends and shows the approximate dividend yield of each
stock, which is a helpful metric that I didn’t see many other sites offer.
And as you can see, there are tons of stocks going ex-dividend on a daily basis.
So many that you would have absolutely no problem buying a stock daily, securing a dividend,
then selling the stock the next day and purchasing a new stock in time for a new dividend.
Does the Dividend Capture Strategy Work?
So the real question becomes… does the dividend capture strategy work?
And this is where things get complicated.
It is a simple strategy, and it’s a surefire way to collect tons of dividend payments throughout
the month.
But in order for it to be profitable and actually be worth your time and effort, we have to
consider some of the other factors at play here.
And the three things we have to consider are price adjustments based on the theory of an
efficient market, the cost of taxes and trading fees, and the overall market sentiment on
a given day.
So let’s take a closer look.
First is the theory that markets are perfectly efficient - and this is one that dividend
naysayers use pretty often against dividend stocks.
This theory assumes that if markets are perfectly efficient, then the price of a stock will
decrease by an amount equal to the value of a dividend, once that dividend is paid out.
So, if a $10 stock announced a $1 dividend, as soon as the dividend payouts were locked
in for shareholders, the theory suggests that the perfectly efficient market will drop the
stock price to $9 to compensate for that $1 dividend per share payout.
I found two studies that attempted to measure the impact on stock price after going ex-dividend.
The first is a study performed with data from 1962 to 1987.
This confirmed that through those periods, the price drop of a stock was not significantly
different from the value of the dividend.
In other words, a stock dropping in price equal to its dividend payout was pretty much
to be expected.
And this would suggest that the dividend capture strategy doesn’t really work.
After all, if you bought our sample stock for $10, got a $1 dividend, then the stock
dropped to $9, you are still at $10 total.
So if this is going to be the case, then a dividend capture strategy certainly isn’t
worth the effort.
However, I found another study performed in 2007 and 2008 that actually found the opposite.
This study randomly tracked 100 stocks from the New York Stock Exchange, analyzing the
price impact of dividend payouts over two years.
Their research found the markets to be what they call “semi-efficient”.
For the year 2008, they found that just like the previous study, stocks typically dropped
by an amount equal to the value of their dividend.
But, in the year 2007, they actually dropped by an amount LESS than the value of their
dividend.
So in these cases, if you were to have used the dividend capture strategy, you would have
made a profit.
And although it seems that in MOST cases the stocks react predictably to a dividend payout,
this second study proves that there is actually some inefficiency in the markets, which means
there is money to be made by the dividend capture strategy.
Of course, this second study also brings up the point of the taxation on dividends.
Since dividends will be taxed, the dividend value to investors might be less than what
is actually paid, which theoretically explains a slightly lesser drop in stock price.
But seeing as taxes and costs are the next big factor to consider when it comes to the
dividend capture strategy, lets dig into that some more.
Taxes are the heavy burden at the core of any stock market investment, especially when
it comes to dividend capture.
And here’s the problem: the dividend capture strategy makes you ineligible for any of the
more favorable tax rates.
For example, consider a stock that pays a qualified dividend, which includes most common
stocks.
The tax on this dividend would be the long term capital gains tax, which for most investors,
including myself, is 15%.
But in order to get this special tax rate, you have to hold the stock for at least 60
days around the ex-dividend date.
So if you bought the day before the ex-dividend, you have to hold for 59 more days to get that
qualified dividend tax rate.
Or, you’d have to buy 60 days before the ex-dividend date to be able to sell on the
ex-dividend date and get the dividend at the qualified dividend tax rate.
With the dividend capture strategy, you’re typically going to be buying and selling stocks
very quickly, almost always holding them for less than 60 days.
And this means instead of that qualified dividend long term capital gains tax rate, you’re
going to be paying income tax on all of those dividends you’ve received.
For me, this is 22%, which is 50% more than that capital gains tax rate.
So this means in order to make a profit with the dividend capture strategy, you have to
make sure your post-tax dividend distributions make up for any drop in stock price that you
see on the ex-dividend date.
With our same example from before, a $10 stock paying a $1 dividend and dropping to $9, actually
leaves you with a loss.
You’ll be paying income tax on that $1 dividend, leaving you with just $9.78.
So the odds are definitely stacking up against us for trying to profit off of the dividend
capture strategy.
If you are trading somewhere that charges fees, then it’s going to be even more difficult
to make this strategy work.
But there’s still one more factor to consider, and that’s the day-to-day price movements
of the overall market.
If you happen to pick up a stock on a good day, and the ex-dividend date falls on a red
day in the market, that stock may end up falling even more than its dividend is worth.
So now, you might be selling at an even bigger loss to snag that same dividend.
And this is something that’s certainly even harder to predict than just the effect of
the dividend payout on the stock price.
So when you factor in the expected drop in stock price, the cost of taxes and trading
fees, and the unpredictability of the overall markets, there really are a lot of variables
going on here that make it difficult to pull off a dividend capture strategy with any meaningful
returns.
Dividend Capture Strategy Tips But I LOVE the idea of daily dividends, so
let’s take a look at 4 ways we can protect ourselves against these risks and perhaps
still find a way to eke out some money from the dividend capture strategy.
The first way is going to involve vetting some of your dividend candidates so that you
can identify the ones that are going to drop as little as possible on those ex-dividend
dates.
And there are two simple strategies I would personally use in this scenario.
The first is to use large cap stocks for the dividend capture strategy.
Large cap stocks tend to be less volatile simply as a result of their size.
Large cap dividend payers are also known to be more stable than large caps in general,
so this could theoretically make them better candidates for the dividend capture strategy.
Of course, this is no guarantee and purely my own opinion, but I think the larger the
market cap, the safer a candidate for dividend capture.
After using this as a rule of thumb for selecting a dividend capture prospect, I would further
screen the stock by analyzing what happened to the price on previous ex-dividend dates.
To give you a quick example, I pulled up Coca-Cola’s dividend history on Nasdaq.com.
Since their recently announced dividend hasn’t happened yet, we can take a look at the price
history around the previous dividend date to identify if this will be a good candidate
for dividend capture.
The record date for the previous dividend was September 15th, which means the 14th was
the ex-dividend date and the 11th was the last day to secure that dividend.
Moving over to Yahoo Finance to look at the historical price data, we can see that Coca-Cola
actually ended up trading at higher prices on the ex-dividend date - although there is
definitely room to lose on this dividend capture if you bought and sold at the wrong times
each day.
But, if you timed it right, you could’ve definitely made a profit on this dividend
capture.
The second way to improve your chances of success with the dividend capture strategy
is to perform it in a tax advantaged account like a traditional IRA or a Roth IRA.
This way, you won’t be paying taxes on any of the dividends you’re securing with the
strategy.
This will instantly widen your margins for trading in and out of stocks, and it could
be the game-changing approach that makes or breaks this strategy.
It just depends whether you want to use your retirement savings for this somewhat controversial
technique, and if your IRA even gives you the ability to do so.
For example, my Roth IRA is set up with M1 Finance, which I love for several reasons,
but it has got to be the absolute worst investing platform for trading individual stocks.
So as much as I’d like to experiment with this inside my Roth IRA, it would just be
a headache to manage.
The third strategy for success with the dividend capture strategy is to exclusively target
special dividends.
Special dividends are dividends that a company pays out on an irregular basis in addition
to its standard dividend payouts.
In most cases, they’re way larger than their usual dividend distributions, which means
there’s a bigger percentage to be gained with the dividend capture.
Of course, these stocks can still fall victim to that ex-dividend date price adjustment,
so that’s something you’ll have to look out for.
You should also know that if a company pays a special dividend higher than 25% of the
stocks value, the ex-dividend date moves until after the dividend is paid, so you’ll also
have to hold these stocks longer in order to obtain the larger dividend.
The fourth strategy I’ve got for you regarding profiting from the dividend capture strategy
actually doesn’t involve buying the stock itself.
Since the stock so often drops on the ex-dividend date, another strategy is to buy options of
a stock so that you can profit when that drop does happen.
An option is essentially a contract that you purchase, which secures you the right to sell
a stock at a certain price.
So, prior to the ex-dividend date, you would buy an option at or near the current stock
price, securing you the ability to sell the stock at its current price.
This contract remains open for several days, so once the ex-dividend date happens and the
stock price drops, your options contract allows you to still sell that stock at that earlier,
higher price.
But since you don’t actually own the stock, the profit comes from selling this options
contract to somebody else who will theoretically cover some of their losses with that trade.
I cannot personally encourage this because I know very little about the world of options,
but what I do know is that there are added risks and costs involved that make it more
complicated than the regular dividend capture strategy.
So if this sounds interesting to you, make sure you do your homework before jumping in.
And actually I’ll probably cover options at some point on this channel, so if you want
me to push that up on my agenda just leave me a comment below.
So those are the four strategies that you can leverage to improve your profits with
the dividend capture strategy.
I also have one more warning for you if you’re thinking about trying it out - do NOT use
the dividend capture strategy on MLPs.
MLPs, or master limited partnerships, are stocks that pay fairly high dividends, but
they have unusual tax repercussions.
Most of their dividends are considered returns of capital, which means they lower the cost
basis of your investment.
So if you perform a dividend capture with these stocks, and sell the stock shortly after,
you might actually owe capital gains tax on the stock even if the stock price drops.
If you want to learn more about navigating these stocks in particular, I have a whole
video about them on my channel that you can check out.
Not ideal for dividend capture, but definitely worth looking into if you’re a dividend
investor.
Overall, the dividend investing strategy isn’t foolproof, but there may be something to it
with the right strategy.
And if you’re like me, you’re probably thinking that there’s got to be a way to
make this system work in your favor.
And lucky for you, I was curious enough to try it out for real.
In fact, I started the month of November with $100 and followed a strict dividend capture
strategy on Robinhood for the whole month.
I’m about to wrap up this experiment, and if you’d like to see how much I made with
the dividend capture strategy, and whether this thing can really work, make sure you
subscribe to the channel to catch that update when it comes.
Until then, let me know in the comments if you’re going to experiment with this strategy
at all!
If you are, good luck, I wish you many hefty dividends, and I will see you in the next
video.