To "capture" a dividend, investors must first buy shares of stock before their ex-dividend date and then sell them right after the dividend is distributed. The two transactions are not long-term investments but are made solely to collect the income.

Dividend Dates And Dividend Capture

Stockholders anticipating receiving dividend payments would do well to familiarise themselves with determining dividend dates. Buying the dividend, or some stockholders employ dividend capture. This strategy carries the potential for loss and may cause you tax problems.

Distributions: The Necessary Elements

Firms send out dividends to their shareholders to reward them for their ownership. These are typically distributed four times a year and can be made in the form of cash or stock. When a company is profitable, management can keep the money and reinvest it or pay dividends to the shareholders. Owners can choose to have the funds deposited into their bank accounts as a cash payment for income purposes or to reinvest and purchase further shares of stock for growth purposes.

The Sequence Of Dividend Payments

Four crucial dates form the basis of the dividend capture strategy:

Declaratory Date:

Board of Directors Declares Dividend Payment. It is on this day that dividends are officially announced. This takes place a long time before any money is exchanged.

The Date On Which A Dividend Is Not Paid:

The dividend is not paid before trading begins. The dividend payment deadline has been set for today. When a dividend is declared, the stock price usually lowers on the same day. Traders need to buy the shares before this date.

The Official Start Of The Countdown:

A dividend will be paid to all current stockholders as of the record date. This is the date on which the corporation officially notifies its shareholders of their dividend eligibility.

Date Of Payment:

The dividend is dispersed to shareholders on this date, and dividend checks are printed.

The Mechanisms of the Plan

The dividend capture strategy's allure is that it doesn't necessitate any fancy fundamental research or intricate charts. Investors and traders typically buy stock shares before the ex-dividend date and then sell those shares on the ex-dividend date or later.

If the share price drops after the dividend are announced, the investor may sit on their cash until the share price recovers to its pre-dividend level. Owners of the shares are not required to wait until the dividend payment date before selling them.

Implementing Options Contracts

Advanced traders use a variant of the dividend capture technique that entails attempting to capture more of the full dividend amount by buying or selling options that should profit from the drop in stock price on the ex-date. At least one stock pays a dividend virtually every trading day, making the dividend capture strategy a viable option for investors seeking consistent returns.

Capturing Dividends Through "Buying the Dividend"

As you might expect, some investors try to "time the market" by purchasing a mutual fund or company shares right before the ex-dividend date to get the dividend. Soon after making a purchase, individuals can decide to sell their stock. The term "dividend capture" describes this method. The investor "buys the dividend," as it were.

Costs Of Dividend Reinvestment Strategies

In addition, the total realized transaction costs reduce returns. The share price will drop on the ex-date, but not as much as the dividend would otherwise have been. There could be a 40-cent drop in price if a payout of 50 cents is announced.

The net profit per share is only 10 cents when taxes are taken out. A sizable stock volume must be acquired to offset the $25 brokerage fees incurred when buying and selling securities. Taking very large positions is necessary to reap the full benefits of the technique.

Practical Illustration

On April 27, 2011, the shares of Coca-Cola (KO) were trading at $66.52, which is a perfect illustration of dividend capture. The stock price increased from 0.41 cents the day before to $66.93 when the board of directors declared a regular quarterly dividend of 0.47 cents on April 28. In theory, the dividend should cause a price increase equal to the dividend amount, but market volatility significantly dampens the influence on the stock's price.

Summary

Buyers of dividend-paying stocks and mutual funds would do well to understand how they function. Included are the dividend dates, which specify when and for whom the payout will be paid. Timing the acquisition of dividend stocks or mutual funds is a potentially risky endeavor that may not pay off for many investors.