What Is A Dividend Capture Strategy? – Will It Work For You?
For the most part, dividend paying companies pay dividends on a quarterly basis. What if you could use the same amount of money and "work the system" so that you could get six dividends per year rather than four? That is exactly what happens with a divide capture strategy. If that is really true then why does not every one do it?
In order to answer that question, and to determine whether a surrender capture strategy is right for you, it is important to understand exactly how the strategy works, what is involved in executing it, and what the risks are. Quite simply, this strategy is one where an investor buys an equity purely to receive the dividend, then sells it to buy another equity that is about to pay a divide. This enables a buyer to realize many more dividends than if they were to buy one stock and simply wait for the quarterly dispute. At first blush, with so many different dividend paying stocks with so many different dividends dates, it would appear that a dividend seeker would be able to employ this strategy and use the same money to receive dividends every month by carefully switching from one dividend payer to another. In theory this is true, but from a practical standpoint it does not make much sense. First of all tax law requires that a stock be held for 61 days in order to be eligible for the 15% tax rate. If held for a shorter period the dividend is taxed at the stockholders regular income tax rate.
Secondly, trading costs would mount up significantly cutting into any potential dividend profits. Thirdly, and most importantly every stock that pays a dividend drops by the amount of the dividend on ex-dividend day (the day that a new buyer will not receive the dividend when purchasing the stock). This drop reflects the fact that paying out a dividend reduces the net value of the company by the amount paid. On the opposite side, stocks often increase in value just prior to going ex-dividend as buyers come in to take advantage of the incoming income. There are buys and sells require very careful timing, and there is no "formula" that can be used for that timing as each individual stock reacts differently each and every dividend period. The goal of a dispute capture strategyist would be to buy a stock before it goes into a "divide run up" prior to ex-dividend day, and then hope that after 61 days the stock will have regained the amount of the ex-dividend drop . Then the investor would repeat the process with another company who dividend is imminent but has not passed ex-dividend day. While, in theory, the strategy is reliably easy to understand, in practice it is rather difficult to achieve the desired goal. A typical problem that occurs is that, while the investor is able to achieve the six dividends, their profits are eroded by capital losses. Either they fail to buy before the "divvy run" or the price of the stock has not reclaimed from the drop that occurred on ex-dividend day.
Dividend capture investors track the history and pattern of individual stocks to determine what is likely to happen around ex-dividend day and try to use historical data in determining when to buy and when to sell. Neverheless, the short window of opportunity caused by the 61 day holding period, makes it very difficult. Additionally, as other investors trade in and out of stocks around ex-dividend date, the old adage that past history is no guarantee more future true.
There are professionally managed funds which employ this strategy and yield very high dividends (Google Dividend Capture Funds). These funds are run by professionals who focus all their efforts on achieving their high dividend goals. A careful look at their history will show that typically they are reliably more successful in rising markets, and many investors have found that by buying in at the wrong time their total yield was significantly eroded by capital losses.
In summary, a divide capture strategy is not as simple as it may first appear. Each individual investor that is considering this strategy should carefully consider the time that they have available to monitor their chosen stocks, and should be cognizant of the very specific timing necessary for this strategy to work. Each individual investor has different investment criteria and their own idea of how much time they should spend on their investments. While I am certain that there are some astute investors that have employed this strategy successfully, I have determined that it is not for me. I personally believe it is more likely that total return will be better by carefully researching high dividend paying stocks and then employing a modified * buy and hold strategy. It may not be as exciting or sexy as a divide capture strategy appears in theory, but for me it works.
* Modified buy and hold strategy: Carefully research investments prior to purchase, establish goals for the stocks that are bought, regularly review performance versus goals, make mid-stream corrections replacing balances that fail to meet performance goals.
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