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Dividend Capture Strategies

Dividend capture involves buying a stock before the dividend is paid, holding it for a predetermined period, and then selling it and moving on to the next dividend stock. In essence, dividend capture is about collecting (capturing) the dividend and then selling the stock for the same price or more than you originally paid.

Dividend Capture Definitions

Before getting into dividend capture details, here are the definitions that you need to know.

Declaration date: the day that a firm announces its next dividend. Such announcements are almost always made via a press release.

Record date: the date that you must be registered as a shareholder to collect the next dividend.

Ex-dividend date: the first day that new buyers are not entitled to collect the next dividend. The ex-dividend date is usually two business days before the "shareholders of record" date (business days are days when New York City banks are open, not stock market days). In the case of very large dividends (at least 25% of the share price), the ex-dividend date is one market day after the payment date.

Payment date: the day that the dividend should be deposited into your brokerage account.

Thus, you only have to own a stock for one day—the market day prior to the ex-dividend date, to collect a dividend. For example, you could purchase a stock on the day prior to the ex-dividend date, sell it on the ex-dividend date, and still collect the dividend on the payment date.

Dividend Capture Strategies

In theory, on the ex-dividend date, the share price opens at the previous day’s close, minus the dividend. For instance, if a stock paying a $0.25 per share dividend closes at $15.00 on the day before the ex-dividend date, it should open at $14.75 on the ex-date. In practice, other market forces, namely the normal push and pull triggered by the balance of supply vs. demand for the shares, often swamps out the ex-dividend effect.

On the theory that the dividend announcement drives the share price up, some dividend capture strategies involve purchasing before the announcement. Then, on the assumption that the share price moves up as the ex-dividend date approaches, some strategies sell on the day before the ex-dividend date, others sell on the ex-date, and others involve waiting until the share price bounces back from the theoretical ex-dividend day drop.

U.S. tax rules say that you have to hold a stock a least 61 days to be eligible for the maximum 15% dividend tax rate, so many strategies involve holding for that period before selling. Alas, doing so would limit you to six trades per year.

Dividend Capture Resources

If you want to try a dividend capture strategy, you need a list of stocks going ex-dividend (dividend calendar). Dividend Detective Premium provides a dividend calendar showing all stocks going ex-dividend within the next four weeks. The calendar shows the dividend amount, the dividend yield, the ex-dividend date and the dividend pay date. Here's a link to the dividend calendar.

D.D. Premium also offers a Special Dividend report that lists upcoming special dividends (one-time payouts) that we investable according to our proprietary criteria. Here's a link to that report (DD Premium subscription required).

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