Dividend Rollover Plan

What Is a Dividend Rollover Plan?

A dividend rollover plan — otherwise called a dividend capture strategy — is an investment strategy where the investor purchases a dividend-paying stock shortly before its ex-dividend date. The investor then, at that point, sells the shares shortly after the dividend is paid, expecting to secure a short-term income stream.

How a Dividend Rollover Plan Works

Users of the dividend rollover plan hope to generate income from the dividend payment while rapidly recoupling most or all of their capital investment from the sale of the shares. In practice, nonetheless, the dividend rollover plan isn't dependably effective. This is on the grounds that, generally speaking, the price of a dividend-paying stock will decline after the dividend is paid, by an amount equivalent to the dividend payment.

On the off chance that this happens, the investor would secure a small loss on the sale of the shares, offsetting the gain from the dividend and delivering a break-even transaction. In such cases, the strategy might be unprofitable on a net basis, subsequent to accounting for trading fees and tax suggestions.

A trader hoping to carry out a dividend rollover plan would do as such by following these means:

1. Pick a stock with an impending dividend.
2. Purchase that stock before the ex-dividend date.
3. The trader can sell on or after the ex-dividend date, yet not before.
4. On the date of record, the dividend is then assigned.
5. Afterward, the dividend is paid out on the pay date.

Traders who utilize this strategy do so in light of the fact that it is simple and they are hedged, albeit just somewhat, by the dividend payout. A few investors will possibly utilize this strategy on the off chance that they are open to holding the stock after the ex-dividend date.

A variation of this strategy is to wagered on the price falling after the ex-dividend date. There is generally a small pullback on the share price as traders and investors capture the dividend and afterward sell. These small price movements can be exploited by options traders, who will buy puts on a stock the day preceding the ex-dividend date, selling the puts conceivably even the next day. This is a lot riskier strategy than essentially buying the stock and selling it subsequent to catching the dividend.

Dividend Timeline

Investors using a dividend rollover plan pay regard for four key dates:

• Statement date: The board of directors declares dividend payment. This is the date when the company declares its dividend. It happens well in advance of the payment.
• Ex-dividend date (or ex-date): The security begins to trade without the dividend. This is the cut-off day for being eligible to receive the dividend payment. It's likewise the day when the stock price frequently drops as per the declared dividend amount. Traders must purchase the stock prior to this critical day.
• Date of record: Current shareholders on record will receive a dividend This is the day when a company records which shareholders as eligible to receive the dividend.
• Pay date: This is the day when the dividend is paid and the company issues dividend payments

The time that an investor is required to hold the stock is just until the ex-dividend date. They can either sell it on that date or on the other hand, assuming that they feel there is a further upside, they might keep it. This relies upon their individual investing strategy. Generally, the type of short-term traders who will utilize a strategy like this will possibly hold the stock on the off chance that it fell in price. They would then sell it at the price they paid for the stock, as the profit as of now exists as the dividend.

Dividend Rollover Plans and Taxes

The simplicity of this trading strategy is offset by its taxes. Dividends come in two forms, qualified and [unqualified](/conventional dividends) dividends. For a dividend to be qualified, it must meet certain criteria. What excludes dividends captured from a rollover strategy is the base time requirement for dividends to be held to be viewed as qualified. This period of time is 60 days before the ex-dividend date.

Since the dividends that are paid to investors who utilize this strategy are unqualified dividends, they are taxed at the Internal Revenue Service's (IRS) income tax rate. Notwithstanding, it is important to note that an investor can stay away from the taxes on dividends assuming the capture strategy is finished in a IRA trading account.

Example of a Dividend Rollover Plan

To illustrate, consider the case of a dividend-paying company that declares that it will convey a dividend of $2 per share, with an ex-dividend date of March 16th. An investor utilizing the dividend rollover plan could buy shares in the stock prior to March fifteenth, and afterward sell the shares on or after March 16th.

Albeit this transaction would effectively "capture" the $2 per share dividend, whether the transaction is profitable on a net basis relies upon the movement in the company's share price, as well as different factors, for example, the investor's transaction costs and tax position.

Price Moves

For example, assume the company's shares trade at $25 and just decline to $24 following the payment of the dividend. In that scenario, the investor could hope to generate a profit of $1 per share on the transaction: buying at $25, getting a $2 dividend, and afterward selling for $24. To the extent that the investor's transaction fees and tax liabilities amount to under $1 per share, then, at that point, this strategy could be considered to find success.

On the off chance that, then again, the share price moves to $23 or lower following the dividend payment, then, at that point, the transaction will have been a disappointment. Subsequent to breaking even on the gross proceeds, the investor would assume a loss in the wake of accounting for their different costs.

Another factor gauging against the dividend rollover plan is the issue of risk. In the above examples, a prudent investor would demand some risk premium to mirror the way that they can't foresee with certainty how the share price will move following the dividend. It is not outside the realm of possibilities, for example, that the share price could move below the $23 breakeven point — due, for example, to negative news unrelated to the dividend payment.

Thus, users of the dividend rollover plan ought to be careful to just apply the strategy to companies whose historical post-dividend price movements have reliably demonstrated that the strategy will probably be reasonable.

The Bottom Line

Investing in a dividend rollover plan has the benefits of being simple to comprehend, requiring no technical or macro analysis. Notwithstanding, your dividends will be taxed at your normal income rate, and there is generally the risk that the stock drops on the ex-dividend date, and selling the stock would kill any gains made on the dividend.

Features

• It includes buying a dividend-paying stock shortly before its ex-dividend date, and rapidly selling it after the dividend has been paid.
• Users of the dividend rollover plan must be aware of the different risks implied in the strategy, as even a minor variance in the post-dividend share price can make the transaction become unprofitable on a net basis.
• Investors would do well to just utilize this strategy with a no-commission broker, ideally in a tax-sheltered retirement account.
• A dividend rollover plan is an investment strategy intended to deliver short-term income.
• This is a tax-weighty trading strategy.

FAQ

Do You Pay Taxes on Dividends If You Reinvest?

You pay taxes on dividends in the event that you reinvest them except if they are reinvested in a tax-sheltered account like a Roth IRA.

How Do You Execute a Dividend Capture Strategy?

Executing a dividend capture strategy is generally clear. You purchase a stock that will issue a dividend, purchasing it before the ex-dividend date. You can either sell the stock on the ex-dividend date (as the dividend has been assigned to you) or you can hold it for longer. The dividend will be delivered to you on the pay date, whether or not you hold the stock or sell it.

How Does a Dividend Reinvestment Plan Work?

A dividend reinvestment plan (DRIP) isn't equivalent to a rollover plan. In a DRIP, dividends are invested once more into the stock they were paid from. This is to utilize a stock's own dividends to purchase more shares, hopefully expanding in growth over the long run.