What is dividend capture strategy and how it works

In our earlier article, we have discussed the traditional approach known as dividend investing strategy, in which a dividend investor buys and holds stocks to generate passive income for a long period of time. When some traders as a part of their trading strategy, buy and sell shares just to capture the dividend the stock pays, its known as dividend capture strategy.

To implement a dividend capture strategy, you need to know the dividend timeline. Which means you can capture the dividend only when you know the general schedule under which all stock dividends are paid to shareholders. You can get these information from a company’s website or filing with stock exchanges. 

We have following four key dates related to dividend payment process;

Declaration Date

Declaration date is the day on which the company announces that they are going to pay a dividend. It’s announced by the company’s board of directors. They announce the dividend size, ex-dividend date and the payment date. Company’s board of directors require shareholders approval to go ahead with dividend distribution. Once it’s authorized by shareholders,  the company is legally liable to pay it to shareholders.

It’s also known as the announcement date.

Record date

On the declaration date, the board of directors decide the record date. It’s the date on which a person must be the owner of the stock on the company’s record to get declared dividend.

To get the declared dividend, investors buy the stock one day prior to the record date as it takes one day to settle the trade.

Ex-dividend date

Ex-dividend date is the day on which the stock starts trading without the value of its next dividend payment. It’s the first day on which the stock is trading ex-dividend. Which means, if you buy shares on this day or later, then you will not be eligible to receive the declared dividend. Dividends will be paid to those shareholders who hold shares before the ex-dividend date.

As buyers are not entitled to get dividend on or after this ex-dividend date, the stock price will usually fall in price.

Ex-dividend dates are set based on the record date and the respective stock exchange’s settlement rules and regulations. In general, the ex-dividend date used to be one business day prior to the record date as it takes one day for settlement. Settlement period is known as the time a trade takes to settle or its the time taken to have investors on a company’s record as shareholders of the company after a stock purchase. 

Therefore, the ex-dividend date will be one day prior to the record date. To get the dividend, the investor must own or have purchased shares before one day prior to the record date i.e. before the ex-dividend date.

In summary, in order to capture the dividend of a company the first thing you need to find out is the ex-dividend date for the next dividend that has been scheduled by the company for payment to shareholders. After finding it, you can purchase shares before the ex-dividend date and sell it on or after the ex-dividend date to get the next dividend. If you already own shares of the company, then in order to get a dividend, you must hold the shares till the ex-dividend date and on or after the ex-dividend date, you can sell it.

Payment date

Payment date is the actual day on which dividends are sent or credited to the eligible shareholder’s account. Eligibility of the shareholders decided on the record date. It’s also known as pay date or payable date, as is the day on which a declared dividend has to be paid to eligible investors.

Payment date usually may be up to one month after the ex-dividend date passes.

After the payment date, the share price of the stock may fall based on the demand. If share prices remain the same or increases on or after the payment date, then it shows higher market demand for the stock.

Please note, only those shareholders who bought the shares before the ex-dividend date will receive the dividend on the payment date.

How dividend capture strategy works

After knowing four dividend dates of a stock, the strategy to capture dividend is simple.

In dividend capture strategy, market participants buy shares of the stock before the ex-dividend date and then sell the shares on the ex-dividend date or at some point thereafter. Which means you have to hold the share for one day to collect the dividend payout.

Anyone who bought the share before the ex-dividend date and didn’t sell, does get the dividend. 

Market participants interested in capturing the dividend of the stock do not wait for the payment date to get the dividend. They know that by selling the stock on the ex-dividend date or thereafter, their name will be listed on the record date as owner of the shares to get declared dividend. Which means if you own the stock on the ex-dividend date, then the dividend will automatically get paid to your account regardless of whether you own the stock on the payment date.

You should also take into account the brokerage fee, tax treatment, and any other expenses that can affect the profitability of your dividend capture strategy. 

Many market participants argue saying that this strategy is not effective as dividend dates and size is known to everyone on the declaration day. However, in practice, till date this strategy is used by many to make profit and take advantage of the market as prices typically dont drop by the exact dividend amount on the ex-dividend date. This strategy does not require you to have in-depth knowledge of fundamental or technical analysis. However, it’s suggested to always invest based on your risk taking capabilities in good quality stocks which are high in demand.

You can also buy the stock before the dividend announcement if you are expecting a higher dividend based on market conditions and sell it on the ex-dividend date or any time thereafter. Instead of selling on the ex-dividend date, you can also wait for some time for recovery in price to a predetermined level before selling.

If you find a huge jump in price on the ex-dividend date because of huge demand for the stock, then you can sell on that day to get higher profit which covers the expected dividend payout.

If you are new to the stock market, we suggest you to take help of a financial advisor before getting into investing in the stock market. Otherwise, you can invest in a mutual fund based on your risk taking capabilities.

is a fellow member of the Institute of Chartered Accountants of India. He lives in Bhubaneswar, India. He writes about personal finance, income tax, goods and services tax (GST), company law and other topics on finance. Follow him on facebook or instagram or twitter.