A dividend capture strategy is an income-focused stock trading strategy that experienced traders also call "buying the dividend." The dividend capture strategy means that you purchase stocks before their ex-dividend date. At this point, you hold onto them until the company issues its dividend payout. Day traders often utilize this strategy to make the most of dividend payouts.
In this article, we'll go over the basics of dividends. We'll also consider dividend dates and payouts and walk through the details of a dividend capture strategy and how you can implement it for your needs. We'll also go over the risks of investing using the dividend capture strategy.
By the time you're finished reading, you'll be able to understand whether the dividend capture strategy approach makes sense for your current needs and future goals.
What is a dividend, exactly? A dividend is a profit that a publicly-traded company pays out to shareholders. The dividends come from a company’s net profits.
It's a good idea to get a comprehensive overview of the basics of dividends because the dividend capture strategy is not for beginning investors. It's also important to recognize that not all companies pay out dividends. For example, a brand-new tech startup may want to reinvest in itself (not shareholders) to get the company up and running. Dividend payouts may ebb and flow depending on how well the company does and due to the regular ups and downs of the market
Investors who are after consistent, regular income may want to consider investing in the Dividend Kings or Dividend Aristocrats to benefit from consistent payments. The Dividend Kings and Dividend Aristocrats have a history of increasing their dividends. Dividend Kings have increased their dividends over the course of 50 years, while the Dividend Aristocrats have increased dividends over the past 25 years.
How often are dividends paid out?
Companies usually pay dividends quarterly, though some pay monthly or semiannually. A company's board of directors must approve each dividend. The company will then announce when the dividend will be paid, the amount of the dividend and the ex-dividend date.
Dividend Dates and Payouts
Before you can adequately understand everything about the dividend capture strategy, it's a good idea to understand dividend dates and payouts. In this section, we'll walk through the dividend dates and payouts, including the declaration date, the ex-dividend date, the record date and the payment date.
The declaration date is the date that the company's board of directors announces its plan to pay out a dividend. On the declaration date, the board of directors also releases both the record and payment dates.
The board of directors of a company sets the record date (also called the day of record). This date shows when investors must be on the company's books in order to receive a dividend payment. You can think of it as the date that the company does a "roll call" to determine the people who will receive the dividend.
The ex-dividend date also called the ex-date, is set one business day before the record date. You cannot buy a stock on the ex-dividend date or any date after that and expect to receive a dividend payment. In addition, if you sell your shares before the ex-dividend date, you will not receive a dividend payment.
The payment date is the date on which you'll receive dividends. How does it work? Your broker puts the cash dividend directly into your account. Dividends typically show up in your brokerage account into your bank accounts within a few days of the date of payment.
What is a Dividend Capture Strategy?
The dividend capture strategy is popular with day and swing traders. (A day trader trades a large amount of short and long trades to take advantage of market price action on a given day. Swing trading, on the other hand, follows short-term trends to achieve stock gains in an investment security.)
Instead of employing a buy-and-hold approach to dividend-paying stocks in order to earn a constant income stream, a dividend capture strategy means that you put together a constant buy-and-sell strategy. You also hold onto stocks long enough to take advantage of the dividend. For example, you might only hold onto the stock for a couple of days or even a single day.
Here's an example of how dividend capture might work. Let's imagine that a company announces the following:
- Declaration date: June 10, 2022
- Ex-dividend date: July 7, 2022
- Record date: July 8, 2022
- Payment date: August 11, 2022
Let's say that an investor chooses to purchase a stock on May 30, 2022, at $65, which occurs alongside a lower-than-average price downturn in the markets. On the declaration date, June 10, the company's board of directors declares a regular quarterly dividend of 50 cents. The investor would receive the dividend as long as they hold it through the record date. Let's say the stock price rose on August 1, 2022, to $68. The investor could then sell the stock and benefit from both the dividend and the increase in the stock price as well.
However, you could coordinate all of this to happen over the course of a day or two.
How to Execute a Dividend Capture Strategy
If you think you might want to start using the dividend capture strategy, here are the basic steps you can take to make it happen.
Step 1: Outline your financial goals.
Figuring out your financial goals: Seems like a tall order, right? However, one of the most important things you can do is to figure out exactly how you want your finances to serve you. Organize them into short-, mid- or long-term goals. Short-term goals are those that are six months to five years away, mid-term financial goals are those that are five to 10 years away and long-term financial goals are those that are more than 10 years away.
When you have specific goals, you can be more targeted with your investments. For example, if your financial goals involve savings to buy a house, save for college for your kids, repair your home, pay down debt, buy a car, give annually to charity, save for retirement, pay off your mortgage — whatever it is — you can align your investments to match.
Finally, understand the amount of money (your net worth) vs. the amount of money you still need to save in order to meet your goals.
Why should you outline your financial goals before you choose a dividend capture strategy? It's important to do this because it helps you determine whether the dividend capture strategy makes sense in light of your overall financial picture.
Step 2: Identify the company you want to target.
What stock do you want to buy? In order to find the right company for a dividend capture strategy, consider looking at a list of stocks going ex-dividend during the week on MarketBeat. Remember, in order to receive the dividend, shares of a stock must be purchased no later than the last trading day before the ex-dividend date.
Even though you usually don't consider the fundamentals of a company when using the dividend capture strategy, you still might want to evaluate long-term expected earnings growth (look for companies that range between 5% and 15%) strong cash flows, low debt-to-equity ratios and strength in the sector and/or industry. Even if you intend to sell the stock quickly, it's still worthwhile to consider the fundamentals because you may want to hold onto the stock instead of simply profiting from the dividend. You may also want to consider the dividend stocks' history, but remember that past performance doesn't guarantee future earnings.
The dividend capture strategy involves buying a stock on or just before the ex-dividend date and then selling the stock after locking in the dividend payment.
Step 3: Purchase your shares before the ex-date.
Identify the number of shares you want to purchase and hit the "buy" button. If you don't already have a brokerage account, shop around for the brokerage for you. Your brokerage will require you to list your name, Social Security number, address, phone number, email address, birthdate, ID, employment status, annual income, net worth and more.
Purchase your shares before the ex-date using a market order (allows you to buy or sell a stock at the best available price), a limit order (a request to buy or sell at a specific price or better), a stop-loss order (once a stock gets to a certain price, a market order begins and the order is filled at that price) or a stop-limit order (once a stock reaches the stop price, the trade turns into a limit order and fills to the specified price limits).
Step 4: Sell your shares.
Finally, you sell your shares soon after the ex-date. If you have a sophisticated organization method, you might sell and capture many shares of stock on different dates throughout the year.
Risks of the Dividend Capture Strategy
There are some risks associated with the dividend capture strategy, including the fact that the strategy can only be lucrative when stock markets are rising. (And obviously, this is the case with any stock strategy.)
Also, remember that it's not free to purchase stock. You'll have to pay your brokerage a commission to buy the shares and also pay your brokerage a commission to sell, and unfortunately, this can wipe out all of your dividend income.
It takes some energy to figure out when to buy, capture the dividend and sell, though it's true that you can forgo all the effort of researching a stock when you intend to use a buy-and-sell strategy. It may be more profitable to buy and hold companies that have maintained or raised their dividends during both economic and stock market downturns because you can continue to benefit from them.
Does the Dividend Capture Strategy Make Sense for You?
Think you want to "buy the dividend"? Short-term traders use the dividend capture strategy to produce income and at the same time, limit capital losses that you might incur when holding shares for a long time.
You might find major benefits to the dividend capture strategy because you don't have to focus on fundamental analysis or stare at stock charts to make a decision about which stock to buy. In short, it offers a simpler investment approach. You don't even have to hold the dividend payment until the payment date to receive the dividend payment.
On the other hand, you may bypass the dividend capture strategy altogether because you may decide that there's a more secure way to profit from your investments. Keeping the stocks in your portfolio might offer you a better return over the long run because a company will continue to pay out its dividend or increase your dividend payment.
Investing in a bull market is fun and relatively easy. When the major indexes are hitting new highs seemingly every day, it's easy to find stocks to buy. By contrast, investing in a bear market may not be as enjoyable. But it's necessary, and when you have a strategy it doesn't have to be hard.
One timeless bear market strategy is to buy dividend stocks. And for investors looking to take even more risk out of this strategy, investors can elect to buy a group of stocks known as dividend aristocrats. These are companies that have a history of issuing, and growing, its dividend year – after year – after year. In fact, to be a member of this exclusive group, a company must have increased its dividend every year for at least 25 consecutive years.
In this special presentation, we'll analyze seven dividend aristocrats who are giving investors a good balance between growth and value. This makes them strong additions to your portfolio as part of a defensive strategy to weather a recession.
Here are 7 dividend aristocrats that can help your portfolio thrive in a bear market.
View the "7 Dividend Aristocrats to Help You Take the Bite Out of the Bear".