Understanding Dividend Capture Strategies: Trading Around Dividend Dates

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Key Points:

1. To understand dividend capture strategies, the basics of how dividends are issued must first be understood. There are X components to how dividends are issued:

a. Announcement Date: When the dividend is announced, which includes the amount of the dividend and the anticipated payout date.
b. Ex-Dividend Date: This is the date on which the stock trades without its dividend. To earn the dividend, the trader/investor must be the registered owner on the day before the ex-dividend date.
c. Record Date: When the list of shareholders who will recieve the dividend is determined. This is typically two dates after the ex-dividend date, and records the list of owners on the day before the ex-dividend date.
d. Payout Date: The date that the dividend is paid to investors.

2. Special Dividends are dividends with a yield of 25% or more (meaning the dividend per share is at least 25% of the share price). Special dividends have a different protocol for determining who is eligible for the dividend; they typically involve a different sequence of events, like so:

a. Dividend is announced
b. Dividend record date occurs
c. Dividend is paid out
d. Stock begins to trade ex-dividend

If a shareholder sells a stock after the record date but before payout date, he/she may be required to return the dividend. As such, for traders/investors who wish to capture special dividends, they should hold it all the way up until the ex-dividend date.

3. Dividend capture strategies involve buying a stock just to capture its dividend, then selling it and moving on to the next dividend capture opportunity.

4. Typically, dividend capture strategies are difficult because of commissions, and because of the higher tax rate in many jurisdictions associated with holding dividend stocks for a short amount of time.

5. For a dividend capture strategy to work, the difference between the price of the stock when the trader buys it on the day before the ex-dividend date and price the trader sells at (which will be the ex-dividend price of the stock) should be less than the net dividend the trader earns. Typically stocks fall by the amount of the dividend per share on the ex-dividend date.

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