Dividend Capture

What Is Dividend Capture?

The term dividend capture alludes to a investment strategy that spotlights on buying and selling dividend-paying stocks. It is a timing-focused strategy a stock just before its utilized by an investor ex-dividend or reinvestment date to capture the dividend. The investor then, at that point, sells it on or after the ex-dividend date at or over the purchase price. The purpose of the strategy is to receive the dividend, instead of just selling the stock at a profit.

Understanding Dividend Capture

A dividend capture strategy is generally utilized on stocks that pay a sizable dividend to make the strategy worthwhile. It is additionally utilized on stocks with high trading volume. This strategy exploits standard cash implantations that outcome from dividends.

There is nobody size-fits-all approach to this strategy. As referenced over, a few investors purchase shares in dividend-paying stocks just before the ex-dividend date and sell it on that date. Others might decide to hold onto their shares for a little while before selling them.

The purpose of this strategy is to make a profit by selling the stock at or over the amount of purchase. This can likewise occur assuming the stock's price drops down by not exactly the amount of the dividend since that capital is allocated to shareholders and is never again part of the value of the company.

Yet, this doesn't necessarily play out that way since share prices don't be guaranteed to drop by just the price of the dividend. There are a number of factors that shape a company's share price. Also, the dividend is just one thing that can influence the price. Demand can likewise say something regarding share prices.

You needn't bother with to be a long-term holder of a stock to collect a dividend payment.

Special Considerations

Stocks under heavy accumulation are less inclined to see a reduction in stock price on the ex-dividend date. A stock in a strong uptrend is likewise bound to appreciate, possibly bringing about a dividend plus a profit on the stock sale.

The flip side is that stocks in downtrends may fall more than expected on and after the ex-dividend date. Subsequently, a trader might opt to exit the stock at a more profitable time, rather than on the ex-dividend date. For example, an investor might sit tight for a better selling opportunity by holding the stock for a couple of extra days. The downside of this is the share price could keep on falling.

Analysis of Dividend Capture

Under most conditions, the dividend capture strategy doesn't deliver a tax advantage. The dividend returns are taxed at the investor's ordinary tax rate. That is on the grounds that the trade isn't held sufficiently long to benefit from the good tax treatment on dividends that a longer-term investor would receive. Nonetheless, the tax treatment of the strategy isn't an issue on the off chance that the strategy is employed in a tax-advantaged account, for example, a individual retirement account (IRA).

Transaction costs likewise should be accounted for by investors. With different major companies paying dividends consistently, this could be an extremely active strategy. The more active the strategy, the more trading commissions are paid. In any case, for certain brokers moving to a no-commission trading model, the chances of effectively utilizing certain active strategies increments.

Example of Dividend Capture

We should expect a $50 stock pays investors a $1 dividend. The stock ought to open at $49 on the ex-dividend date. In a rising market, it opens the next morning at $49.75 or even $50.20. Regardless, the dividend capture investor can sell the stock and create a net gain. They receive $1 per share in dividends and just assume a $0.50 loss (at $49.50) on the stock. On the off chance that the stock were to open at $50.20 (conceivably in light of the fact that the more extensive market is up fundamentally), the trader nets $1.20 per share.

However, there are risks. The price of the stock could likewise open lower than expected, say at $48. In this case, the trader winds up with a net loss of $1 per share ($48 - $50 + $1). The dividend amount is fixed, yet the potential loss amount isn't.

Genuine Example of Dividend Capture

Microsoft

On Feb. 19, 2020, Microsoft (MSFT) went ex-dividend subsequent to proclaiming a $0.51 dividend. The stock closed at $187.23 the day preceding the ex-dividend date. Shares might have been purchased costing this much or below. Holding shares before the ex-dividend date qualifies the trader for the $0.51 dividend.

The next day the stock opened at $188.06. The trader could promptly sell their holdings, securing a $0.83 profit on the shares, on top of the $0.51 dividend. It is worth taking note of that MSFT was in a strong uptrend at that point.

Delta Air Lines

Around the same time, Delta Air Lines (DAL) went ex-dividend. The company declared a $0.4025 dividend for every share. The stock closed the prior day at $58.72.

The next morning, the ex-dividend day, the stock opened at $58.49. The trader could sell at this price for a $0.23 loss on the shares, yet in addition receive the dividend of $0.4025, for a net profit of $0.1725 per share. The stock, however, was in a choppy and trendless period as of now.

Highlights

• Traders can capture net profits if the price of the stock drops not exactly the dividend amount or transcends the purchase price.
• A stock ought to drop by the dividend amount on the ex-dividend date, which actually nets the investor a profit.
• Dividend capture includes buying a stock before the ex-dividend date to earn the dividend, then sell it on or after the ex-dividend date.
• This doesn't necessarily in all cases occur, as there are various factors that influence share prices, including demand.