Dividend capture strategies—three approaches to skip

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 …

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Feb 2010 DIA dividend capture

Bought DIA at 101.17, sold-to-open Feb 99 calls at 2.44 — both with market orders, for a net debit of 98.73.    Pretty frustrating morning– tried to do buy-writes first thing today with a net debit amount, but I  never got a fill, even though I was splitting the ask/bid price or slightly more generous on the options (97 calls at that point).  I don’t …

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DIA dividend capture

The SPDR Dow Diamond ETF is an interesting candidate for a dividend capture strategy–if you can do it in a tax sheltered account such as a traditional or ROTH IRA.   On an annual basis is it yielding around 2% and it distributes dividends monthly.  Its dividend payouts are not consistent month to month, they vary from an average of  $0.11 in January over the last 5 years, to and average of $0.33 in October.  The chart below gives details.   February’s average payout is around $0.25, which is pretty close to a .25% return since the DIA is around $100 per share right now.

DIA is unusual for a index ETF offering monthly dividends, in that its ex-dividend dates are the day before the option expiration date for that month.  For example DIA goes ex-dividend on 19-February and the last day of trading on the options is also the 19th with expiration on Saturday the 20th.

This arrangement sets up a straightforward dividend capture scheme using covered calls.   You buy DIA and sell DIA ITM calls, with an extrinsic  value (time value) of approximately the dividend value (historically about 0.25 for February).  At closing today, with DIA at $101.5, this would suggest the 98 Feb call, which at $3.75 would give the target extrinsic value.  The break-even point on this position will probably be 101.5-3.75 =97.75.  I say probably, because there is uncertainty on whether you collect the 0.25 per share dividend or not.

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