Dividend Capture Strategy – Will It Work For You?

January 22, 2021

This is one investing method that exemplifies the saying, “nothing ventured, nothing gained”. In theory, the dividend capture strategy is one way for adventurous and agile investors to realise quick returns. Will it truly live up to its very attractive moniker? Let us first look at the definitions and terminology of the dividend capture strategy.

In definition, dividend capture is a timing-oriented investment strategy focused on buying and selling dividend-paying stocks at specific times. Dividend capture investors will buy a dividend-paying stock just before its ex-dividend date to pocket the payout, then sell it as quickly as possible on or after the ex-dividend date. To make this worth their efforts, they tend to focus on stocks that pay out a considerable dividend or zoom in on stocks with high trading volume.

Compared to a buy-and-hold strategy, this method is no doubt riskier.

The traditional approach of buying and holding stable stocks is meant to generate steady income through receiving regular dividends. The dividend capture strategy meanwhile, requires frequent buying and selling of shares, holding them for only a short period of time; sometimes just long enough to capture the dividend before selling it.

The Dividend Timeline and Terms To Know¹

Declaration Date

The day when the company declares its dividend.

Ex-Dividend Date

The security starts to trade without the dividend. This is the cut-off day for eligibility to receive dividends. It is also when the stock price often drops in accordance with the declared dividend. Investors must purchase the stock prior to this day.

Record Date

Current shareholders on record will receive a dividend. This is the day when a company records which shareholders are eligible to receive the dividend.

Pay Date

This is the day when the company issues dividend payments.

Source: Investopedia¹

If this strategy sounds like a dream come true, you need to be aware of the limitations and conditions that apply. For one, future dividends are priced into any dividend-paying stock’s current share price. Therefore as soon as a company announces and declares its dividend, theoretically its share price will adjust downward. The difference becomes more apparent for larger dividends such as the $3 payment made by Microsoft in the fall of 2004, which caused shares to fall from $29.97 to $27.34.²

In reality, the stock market may not be perfectly efficient, thus leaving a small window for investors to capture the opportunity.