Dividend Capture

How I wish I could make Dividend Capture work.

If you're unfamiliar with it, the dividend capture strategy theoretically works like this: you purchase shares in dividend paying companies and hold just long enough to qualify to receive the dividends. Then you sell the shares, having "captured" the dividend, and move on to the next dividend paying stock.

For additional information related to the Dividend Calendar, see the related Dividend Dates page.

If you own stocks that pay dividends for the long haul, you typically receive distributions just four times a year. But with this strategy, if you were nimble enough, you could conceivably qualify for a new dividend every day.

Dividend Capture Drawbacks

Unfortunately, there are some serious drawbacks to implementing this strategy.

The most pressing obstacle is that the market is fully aware of the dividend calendar as well. As a result, with all else being equal, a company's share price will open on the ex-dividend date lower by the amount of the dividend.

So yes, you qualify for the dividend, but now when you try to sell the stock, the share price is down by the same amount.

It's a wash.

Of course, there are a lot of other factors determining share price besides ex-dividend dates. Obviously, stocks that pay dividends don't always trade down to the exact amount of their dividend (and stay down) following their ex-dividend dates.

Consequently, those who employ this strategy often elect to hold onto the shares long enough for the stock to "bounce back" before selling. Sometimes that actually happens the same day, sometimes it takes a few days, and sometimes it takes a few weeks.

And sometimes it may takes months, years, or may, in fact, never happen at all.

Just because a company pays dividends doesn't mean that it will trade in a range and allow you to collect more than your share of dividends and recoup all the attendant downward price fluctuations at the same time.

In the end, this is a form of gambling.

It may work in bull markets or uptrends in that you have a better chance of getting your dividend without facing any capital losses. But, I suspect, the strategy underperforms relative to long term investing during those same bull markets and uptrends since you're most likely going to sell the shares as soon as possible and therefore miss out on those upside moves, some of which will dwarf the dividend you were originally attracted to.

And you're definitely going to get hurt employing the strategy during bear markets. The dividend income you receive is small consolation for a stock in a strong downtrend.

The elusive fact to keep in mind is that with Dividend Capture, what you're really hoping to capture isn't the dividend but rather a quick snap back in the share price following the ex-dividend date.

It just seems like a lot of risk trying to get something for nothing when there are a lot more attractive strategies that enhance long term investing instead of trying to outsmart it.