The dividend capture approaches that I describe below do work some of the time. My experience is that they expose the investor to excessive risk relative to the payoff–or they don’t pay off often enough.
- Buy and hold dividend paying stocks
- If you love the stock, this is a fine strategy, but then it really isn’t a dividend capture strategy. The dividend is just a bonus. If you don’t particularly like the stock, or don’t know much about the company / index then the price risk you assume typically swamps out the dividend.
- An advantage of this approach is that if you hold the stock long enough then you qualify for qualified dividends which currently have a lower tax rate. I prefer to do dividend capture in IRAs or other tax deferred accounts so the small gains aren’t ravaged by taxes.
- Buy the day before ex-dividend and sell at closing
- Many dividend paying stocks do have a run-up the day before ex-dividend, but market risk makes this an iffy proposition.
- If the stock tanks due to market action it is tempting to not sell and at least collect the dividend, but this is often a bad idea. The stock will typically drop the amount of the dividend at opening regardless of the market conditions and if the day before was bad, the momentum is clearly negative. Investors that don’t follow the ex-dividend dates might conclude the stock is continuing to weaken and bail out.
- Buy the stock a few days before ex-dividend and sell deep in the money calls options on the stock—hoping they won’t be exercised.
- This would be a fine strategy if the options market makers were stupid. Clearly they are not. Usually a few days before ex-dividend the premium available on the deep ITM calls drops to near zero, and they will almost certainly be exercised the night before the stock goes ex-dividend—leaving you with nothing.
- It is tempting to sell not-so-deep ITM options to get some premium up front. If the option expiration date is not close to the ex-dividend date this is generally a bad idea. If the premium is attractive then you typically are not very deep in the money—exposing you to market risk. Unless the underlying moves strongly up your options will probably not be assigned and then you will see a nasty jump in option premium starting at opening on the ex-dividend date—making it unprofitable to close out the position until near the option expiration date.
- Assignment Risk, Short Calls, And Ex-Dividend Dates
- Top 11 questions about dividends
- Overview of dividend capture strategies
- Saving money with combination orders
- Dividend capture by buying SPY and shorting IVV?
Tuesday, September 10th, 2013 | Vance Harwood