Investing > Dividend Capture Strategy Explained

Dividend Capture Strategy Explained

Dividend capture investing strategies have pros and cons—they're not for everyone. Learn if they're right for you.

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Updated January 08, 2022

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Johnny stares at candlestick charts all day, trying to spot the next day trading opportunity while his eyesight continues to degrade by the minute.

Do you want to be like Johnny? Nope – me neither. 🚫

Fortunately, not all investment strategies have to be complicated.

A dividend capture strategy helps day traders and short-term investors “capture” dividend payments without holding the underlying stock’s long-term. Companies like to be consistent with dividend payments, as made evident by the fact that S&P 500 dividend payments hit a new record even during a global pandemic in 2020—which means there’s no shortage of dividends to capture. 💰

The idea seems relatively straightforward at first—you buy a dividend-paying stock with the singular purpose of receiving the dividend, and you sell those shares as soon as it’s received. If you sell close to the buying price, you can still net a profit with the additional dividend income. 

However, in reality, it’s not quite that easy, as a few complexities can make things tricky. For example, a common criticism of this strategy is taxation, as short-term traders do not get the same favorable tax treatment for dividend income as long-term shareholders. Instead, the income attracts the ordinary income tax rate, which can be significantly higher.

All in all, dividend capture is not a conventional investment strategy—and it requires some know-how to execute properly. So, in this article, we will examine how the strategy works, how to use it effectively, and what pitfalls you need to avoid to make a profit.

What you’ll learn
  • Dividend Capture Investment Strategy
  • How to Use Dividend Capture
  • Dividend Capture Timeline
  • Good Stocks For Dividend Capturing
  • Tips for Picking Good Stocks
  • What Are the Best Dividend-paying Stocks?
  • Dividend Capture Strategy Drawbacks
  • Real-World Examples
  • Conclusion
  • Get Started With a Broker

What is Dividend Capture as an Investment Strategy? 💡

In the simplest terms, dividend capturing is an active investing strategy that allows you to receive dividends without taking on the risk of holding the underlying shares for the long term. Instead, the idea is to hold the shares long enough to become eligible for the dividend and sell them once the company allocates the dividend on the ex-dividend date (more on this in the Dividend Capture Timeline below).

Stock prices usually drop after the dividend is allocated. Let’s look at a quick example: Op Bancorp (OPBK) pays a quarterly dividend—we will look at its ex-date on 4th August 2021. The dividend declared was $0.10 per share, and the stock fell by $0.27 on the ex-date, opening at $10.83 and closing at $10.62.

However, you can still be profitable if the price drop is less than the dividend received or if the share price rises above the buying price. As you might have guessed by now, there’s a fair bit of luck involved in the execution.

The share price can always drop so much that you end up with a loss despite receiving the dividend. If there were a fool-proof mathematical model that could figure out the best way to execute a dividend capture strategy, it would be far more popular than it is. But, unfortunately, there’s more art to this than science.

How to Use Dividend Capture 🤔

Now let’s look at how we can use dividend capture as an investment strategy.

First, we need to find dividend-paying stocks. Not all companies pay dividends, and the payment schedule varies for each. Fortunately, all the information regarding that is declared publicly by the company.

Next, it is vital to get the timing right as the goal is to buy and sell the shares as quickly as possible while still qualifying to receive the dividend.

To receive the dividend, traders need to purchase the shares before the ex-dividend date (when the share starts to trade without the dividend value) and should be a registered shareholder on the record date (when the company records all its shareholders for paying the dividend).

As long as the trader is a company shareholder on the record date, they will receive the dividend. Technically, you are free to dispose of the shares on the ex-date since stock exchanges take time to settle transactions. However, a dip in the price is expected on the ex-date since the dividend payment affects the company’s finances.

If the drop in the share price after the ex-date is smaller than the dividend received, the trader ends up with a profit. However, if the reduction is more considerable, the trader can end up with a loss.

Dividend Capture
PFE, a stock with a 3.6% dividend yield, dropped just 2% in the ex-dividend date, making the minimum gross profit of a dividend capture 1.6%. Image by TradingView.

We assume the share price will drop because that’s how an efficient market responds to the news of a company paying dividends. However, in reality, the decline in share price will not be precisely equal to the dividend distributed since markets are not entirely efficient. 

Before we get to a practical example that demonstrates the strategy, let’s look at the dividend capture timeline, which is critical to understand if you plan on using this strategy.

Dividend Capture Timeline ⌛

There are four important dates when it comes to dividend payments:

1. The declaration date – the board of directors announces the dividend size and other relevant information.

2. The ex-dividend date (also known as the ex-date) – the company allocates the dividend, and the stock starts trading without the dividend value. To become eligible for receiving dividends, investors must buy the shares before this date.

3. The record date – the company notes its shareholders and makes the current ones eligible for the dividend.

4. The payment date – the company pays the dividend to the shareholders.

Dividend Capture
The dividend capture timeline helps us understand when to buy the shares to have the right to receive the dividend. 

Now that you have an overview of the timeline, let’s dive in a bit more and take a look at the specific dates in-depth:

Declaration Date 🗓️

The declaration date is the day on which the company’s board of directors announces the dividend payment. The board will also announce the ex-dividend date and the payment date along with the dividend’s size.

The declaration is also called the announcement date. However, in the context of the dividend capture timeline, it is not extremely important since it has no fundamental impact other than the information becoming available to the public.

Ex-Dividend Date / Ex-Date 📟

In contrast to the declaration date, the ex-dividend date is crucial as it is the day the company allocates the dividend and the stock starts trading without the value of the dividend attached. Therefore, to become eligible for the dividend, an investor must buy the shares before this date.

The ex-dividend date is usually a business day before the record date because stock exchanges take at least a business day to settle transactions. So if an investor buys the shares one business day before the record date, they will not be counted as a shareholder since the transactions would not have settled by that date.

Dividend capture is a timing-oriented investment strategy focused on buying and selling dividend-paying stocks.

Similarly, if a shareholder sells their shares on the ex-dividend date, they would still be counted as the company’s shareholder and be eligible for the dividend.

Record Date 📆

The record date is when the company records the current list of shareholders for dividend payments. Since the shareholders are constantly changing, the company will only consider the shareholders on the record date to be eligible.

Payment Date 📅

The payment date is when the shareholders receive the dividend. It usually comes within a few weeks of the ex-dividend date but can be up to a month away from it. The stock price can often fall on the payment date as the distribution of profits is considered to hurt the company’s finances. 

What Stocks Are Good For Dividend Capturing? 🎯

At this point, you might be wondering how to find the best stocks for dividend capturing. While not all companies pay dividends, many do, and it is even possible to earn dividends daily with the sheer number of options available. Here are two aspects to consider when picking dividend-paying stocks:

Dividend Yield 🛡️

The dividend yield is the ratio between the dividend paid per share and the share price, usually expressed as a percentage. For example, if a company pays a $1 dividend per share and the stock is trading at $200, the dividend yield for that stock would be 0.5% ($1 / $200). Thus, the dividend yield helps in comparing different dividend-paying stocks.

The dividend payout ratio is the ratio of the total amount of dividends paid out to shareholders relative to the net income of the company.

In general, blue-chip companies with a proven track record of dividend payments usually offer a low dividend yield, while riskier companies provide a higher dividend yield. For example, Microsoft’s (MSFT) dividend yield is approximately 0.78%, while it is 5.76% for Gaming and Leisure Properties (GLPI).

Some high ranking traders and investors don’t think the risks of the Dividend capture strategy are worth it, nor that they will work. Dividend-capture funds aren’t the place to look for yield, says closed-end fund strategist Mike Taggart.

Dividend Payout Ratio 💰

Another way to compare dividend-paying stocks is to look at the dividend payout ratio. To calculate the ratio, divide the dividend paid by the net income received. 

To find the dividend payout ratio of a single share, divide the dividend paid per share by the earnings per share.  For example, a company with an EPS of $10 and a $0.5 dividend per share will have a dividend payment ratio of 0.05—generally speaking, the lower this ratio, the more stable the company’s finances.

Historical Dividend Growth ⬆️

The historical dividend growth of the stock also gives us information on how the company has been performing. Since dividends are essentially extra profits earned by the business, a successful company should ideally pay more in dividends over time as it grows.

For example, some dividends have shown that they are consistently good. Take a look at McDonald’s. It has been growing steadily for more than 40 years, and is considered fairly safe by many analysts.

Tips for Picking Stocks That Are Good for Dividend Capturing 💭

It might seem that the best approach would be to simply buy stocks that have the highest dividend yields since they will pay the highest dividend per share. However, companies that offer very high yields are prone to volatile price fluctuations, leading to losses.

Yet, picking stocks with a meager yield is not ideal either as they will not provide significant profits after the costs incurred in the trade. Generally, it is better to stick to reliable companies with solid fundamentals and sustained revenue growth. Ideally, you should be looking at a stable large-cap company with a dividend yield between 3% to 5%.

If you’re planning on using the dividend capture strategy on multiple stocks, it is better to diversify and pick stocks from different sectors to insulate your holdings from an unexpected macroeconomic event.

💡 Are dividend stocks your thing? Learn about the pros and cons of the dividend discount model.

What Are the Best Dividend-paying Stocks?

At this point, you might be wondering which stocks would be the best picks for this strategy. Naturally, the stock should be a dividend-paying one for this strategy to work, but other factors play a role too. Ideally, we are looking for stocks with a proven history of paying dividends and tend not to lose a lot of value after the ex-date.

Here are some stocks that you can consider for a dividend capture strategy:

StockDividend YieldFirst Dividend Payment YearLatest Dividend Payment YearLast Dividend Growth YoYCurrent Schedule
Pfizer Inc. (PFE)3.50%198020212.60%Quarterly
Vistra Corp.(VST)3.10%2019202111.10%Quarterly
EPR Properties (EPR)*5.93%199820214.20%Monthly
Procter & Gamble (PG)2.45%1989202110%Quarterly

*EPR Properties (ERP) had to suspend its monthly dividend payments from May 2020 as it entered into a covenant relief agreement with lenders. However, the company opted out of the relief period earlier than expected and has resumed paying monthly dividends again.

Dividend Capture Strategy Drawbacks 📋

As addressed in the introduction, dividend capture is not a conventional investment strategy, and there are several drawbacks. For starters, the dividend calendar is available to all investors, which means the stock price is highly likely to go down on the ex-dividend date, which means the profit margin will likely be tiny.

It can also be tempting to wait for the share price to “bounce back up,” but there’s always a chance that might take years to happen. Other concerns include the tax implications and additional costs that can accumulate when following an active investing strategy—needles to say, long-term dividend investing is significantly more hassle-free. 

Tax Implications 📈

“Qualified dividends” and “ordinary dividends” are taxed differently in the United States. The dividends captured using this strategy are considered “ordinary dividends” since traders do not hold them for long.

In case you’re curious, qualified dividends refer to dividends received from stocks that have been held for more over 60 days in a time period of 121 days that starts exactly 60 days prior to the ex-dividend date. 

Qualified dividends get taxed at the following rates based on the income bracket—0%, 15%, and 20%. On the other hand, ordinary dividends incur the ordinary income tax rate, which can be as high as 37%, depending on the income bracket.

The increase in tax rate can significantly lower the profit margin and can even make the strategy unprofitable. However, it is worth noting that investors can avoid taxes if they use an IRA trading account—but IRAs don’t support trading on margin, which primarily makes them unviable for trading like this.

Other Costs 🏷️

Taxes are not only the costs that can lower the profit generated using this strategy. For example, transaction costs can become a significant expense when you’re actively buying and selling a large number of shares. 

Since the profit margin per share is usually relatively low, high transaction costs can drive it even lower. Using some of the top discount brokerage platforms is the best way to mitigate this issue.

Real-World Examples 🗺️

Let’s look at some real-world examples to see how the dividend capture strategy plays out. Omnicom (OMC) is one of the largest advertising and marketing agencies worldwide and has consistently paid dividends to its shareholders.

On 4th April 2021, the company declared a quarterly dividend of $0.70, and the ex-dividend date was 10th June 2021. Being aware that share prices usually appreciate leading up to the ex-dividend date, we buy the stock at $83.02 on 1st June 2021.

After the ex-dividend date passes by, we sell the stock on 14th June 2021 at $82.57 after we become eligible to receive the dividend. The price of the stock decreased by $0.45 after the ex-dividend date, as we had anticipated. However, since we will receive a dividend of $0.70 per share, we made a $0.25 per share ($0.70 – $0.45) profit. Do note that the net profit will be lower after considering taxes and brokerage costs.

profitable dividend capture
Even making an inefficient trader can end in a profitable dividend capture. Image by TradingView.

Another example of a stock with a good dividend-paying history is Realty Income (O). On 16th June 2021, they declared a dividend of $0.2355 with the ex-dividend date as 30th June 2021.

Let’s say we buy the stock on 17th June 2021 when it traded at $68.23 and wait for the ex-dividend day. On that day, the price starts to fall, and we sell the shares at $67.05 on the next day to avoid further losses. While we are still eligible to receive the dividend of $0.2355 per share, our loss after selling is $1.18, bringing our net profit down to approximately -$0.94 per share.

📖 Looking for other strategies? Learn how CANSLIM works.

Conclusion 🏁

Now that we’ve covered almost everything you need to know about the dividend capture strategy, it’s time for a quick recap. At its best, the dividend capture strategy is a smart investing strategy that can generate income regularly. However, it is far from perfect, and since stock prices tend to move unpredictably, you can end up with some hefty losses.

Ideally, the best stocks for this strategy are reliable, financially solid companies with a good-enough dividend history and yield—especially the ones you believe will rally quickly after dropping on the ex-dividend date. Unfortunately, companies offering a very high dividend yield often have volatile price action, so you never know for sure.

Taxes and other costs make it even more challenging to extract consistent profits, so it is impossible to create a generic trading strategy for dividend capturing that works for every stock. Yet, it is possible to rack up decent profits with a few educated guesses and a little bit of luck. And remember, you can always turn to a number of helpful options trading alert services to aid your very own investing strategy.

Dividend Capture Strategy FAQs

  • What’s the Difference Between Ordinary Dividends and Qualified Dividends?

    The difference between ordinary dividends and qualified dividends is that both are taxed differently. While qualified dividends attract lower tax rates, ordinary dividends are taxed at the ordinary tax rate of the individual.

  • Does the Dividend Capture Strategy Work?

    The dividend capture strategy does work, and it is possible to earn profits using it. However, the yields can vary with each stock and are not guaranteed. So while it might be risky and challenging to make the strategy work consistently, it is not impossible.

  • Should I Buy Before or After the Ex-Dividend Date?

    You should buy before the ex-dividend date if you want to receive the dividend. If you buy on the ex-dividend date or after it, the company will not consider you as a shareholder on the record date, preventing you from receiving the dividend.

  • What Is Dividend Scalping?

    Dividend scalping refers to buying a stock one day before the ex-dividend day and then selling it the next day. It is essentially the most stripped-down approach to dividend capturing, where you’re holding the underlying share for the least amount of time required to receive the dividend.

  • How Long Do You Have to Hold a Stock to Get the Dividend?

    You do not have to hold a stock for a long time to get the dividend. Since shares are constantly changing hands, companies select a date to list all the current shareholders, known as the record date. If you’re among the active shareholders on this date, you become eligible to get the dividend.

  • Can I Earn Dividends Only on American Stocks?

    No, it is possible to earn dividends on American stocks and also foreign stocks and ETFs trading on the stock market. Similarly, it is also possible to capture the underlying stock’s dividend using the dividend capture strategy.

  • Why Can’t I Just Hold the Dividend-Paying Stock Longer and Avoid the Higher Tax Rate?

    Of course, you can hold the dividend-paying stock longer and avoid the higher tax rate. However, the strategy’s objective is to generate income, and the stocks that might be suitable for it might not be an excellent long-term investment.  

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