Dividend capture is an advanced investment strategy where you purchase a dividend-paying stock right before the dividend is paid, hold it long enough to receive the dividend, and then sell the stock.
The objective of dividend capturing is to sell the stock for the same or higher price than you paid for it, so you “capture” a dividend you normally wouldn’t be entitled to receive.
If done properly, the only cost to you the investor is the transaction cost, if any.
Essential Dates to Know
You cannot be successful at capturing dividends unless you know a number of very important dates for each stock you’re trying to capture dividends with.
The declaration date is the day a company’s board of directors announces the payout amount of the next dividend. It normally happens a few weeks before the payout. You can do a quick Google search of any company to find when the declaration date is.
The declaration date is the least important date for you to know, but it helps you strategize whether or not you want to try to capture any given dividend. Knowing how much is being paid out will help you decide whether or not dividend capturing is worthwhile or not.
The record date is extremely important. It is the date a company looks at its books and figures out who is entitled to receive a dividend payout. If you don’t own the stock on the record date, you won’t receive any dividends.
A lot of people get confused about the ex-dividend date, but it is actually the most important date you need to know as someone investing in dividend stocks. The ex-dividend date is the date you need to purchase a stock in order to be eligible to receive a dividend payout. It is normally a day or two before the record date.
Brokerages need to settle your purchases behind the scenes, and it normally takes a few days. This means you have to purchase a stock a day or two before the record date, so your order is officially fulfilled, and you own the stocks on the record date. If you miss the ex-dividend date, you won’t own the stock on the record date and won’t receive any dividends.
Finally, the payable date is the date you receive your dividends. Even if you no longer own the stock, you will still receive your dividends as long as you held the stock on the record date.
How Dividend Capture Works
Now that you understand all the jargon, it is time to talk about how dividend capture actually works. The premise behind dividend capturing is you purchase shares of a dividend-paying company right before the ex-dividend date. As soon as the record date has passed, you are free to sell your shares in the company. It isn’t quite that easy though. Typically, a dividend-paying stock will drop by the amount of the dividend being paid on or around the ex-dividend date and record date.
You need to hold onto the stocks you purchased long enough for the share price to bounce back to where it was when you purchased the stocks. Once the stock has rebounded, you are free to sell your shares at a break-even price. If the markets are hot, you may even make a little money when you sell the stocks you bought with which you can capture dividends.
Dividend Capture can be Risky
Investing with the purpose to capture dividends can be risky. You’re making short-term investments, and anything can happen. You may purchase a stock to capture dividends right before a market crash. If that were to happen, you wouldn’t be able to sell your stocks at a break-even price for a long time.
You would have to make the decision to either hold onto the stocks until the market recovered, which could take months or even years, or sell them at a loss. Neither option is desirable when your goal was to make a quick, short-term investment.
It May Not be Very Profitable
On the surface, dividend capture sounds like a great investment strategy, but when you look closer, that might not be the case. Most companies only pay a few cents per share in each dividend payout.
You need to buy a significant number of shares in order to make a decent profit, and most millennial investors don’t have enough money to justify the time and effort required to capture dividends on a regular basis. On top of that, you have to consider the transaction fees. Many self-directed brokerages offer no-fee trading, but many still charge users a fee per trade. You’ll make two trades when capturing dividends, and you need to factor in the fees when deciding if it is the right strategy for you.
Long-Term Dividend Investing is a Better Strategy
If you’re a young, millennial investor, you’re probably better off buying and holding dividend stocks instead of trying to capture dividends. If you reinvest your dividends over the decade or more you hold a dividend-paying stock, you’re bound to make more money than you would by trying to capture dividends on a regular basis.
Holding dividend stocks long-term is also a lot more passive. You don’t have to worry about remembering ex-dividend dates or checking to see if the stock is at its break-even point for you to sell. All you have to do is buy the stock, set up your DRIP (dividend reinvestment plan), and wait for your wealth to grow.
Dividend capture is an investment strategy used by short-term investors who want to receive a dividend payout and then sell the stock shortly afterward. You need to be organized and keep track of a number of important dates — especially the ex-dividend date — in order to succeed with the dividend capture strategy.
You also need a large amount of money available to be invested in order to make dividend capture worth your time and money. Dividend capturing can be profitable, but it probably isn’t the right investment strategy for the average retail investor.