A well-established and profitable company frequently distributes its profits out to its equity shareholders in the form of dividends. This is primarily done since the equity shareholders of a company are essentially considered to be the owners of the said entity, and as a result, possess a claim on the profits of the company.
A company that frequently distributes dividends out to its shareholders are typically considered to be more favourable simply because of the fact that these dividends act as a source of steady income for investors. That said, many investors think that investing in a company for the long-term is necessary in order to receive dividends. This is simply not true. In fact, traders and other short-term investors can also receive dividends paid out by a company by utilizing a specialized investment strategy called the dividend capture strategy.
If the question ‘what is dividend capture strategy?’ is running on your mind right now, here’s everything that you should know about this unique concept.
What is dividend capture strategy?
The dividend capture strategy is essentially an investment strategy that many traders and short-term investors employ to scalp the dividend that a company pays out. Such a strategy involves staying invested in a company just long enough till the record date. Once the record date passes, the trader or investor makes a complete exit by selling the stock.
Before we go deeper into the workings of the dividend capture strategy, let’s first take a quick look at some of the important dates that you need to know and keep in mind when executing such a strategy.
- The dividend declaration date: This is the date on which the board of directors of the company declares the dividend. Along with the declaration of dividend, the board also usually notifies the following three dates as well.
- The ex-dividend date: The ex-dividend date essentially acts as a cut-off date. Buyers of the stock of a company on or after this date will automatically be adjudged as ineligible to receive dividends declared by the said company.
- The record date: Also known as the date of record, the record date is the date the company uses to determine which of the equity shareholders are eligible to receive the dividend. To put it in more simple terms, all of the on record equity shareholders of the company as on the record date will automatically become eligible to receive the declared dividends from the company.
- The dividend payment date: This is the date on which the dividend gets credited into the bank accounts of all the eligible equity shareholders of the company. The dividend payment date is always after the record date.
Now that you’re well aware of all the relevant dates involved with respect to a dividend declaration by a company, let’s take a look at an example to better understand the dividend capture strategy.
Assume that there’s a company, ABC Limited, that has declared a dividend on March 02, 2020. The company has notified March 06, 2020 as the record date for determining the eligibility of the dividend payout. The ex dividend date has also been notified to be March 05, 2020. The dividend will be paid out to all the eligible equity shareholders on March 09, 2020.
In this case, an investor looking to make use of the dividend capture strategy is required to buy the shares of the company anytime after the dividend declaration date of March 02, 2020. However, the investor should exercise a bit of caution and should purchase the shares well before the ex dividend date. Therefore, this gives the investor a short window from March 02, 2020 to March 04, 2020 to invest in the company.
Once the investor has bought the shares of the company within the window mentioned above, he or she should hold it till the ex dividend date. On the ex dividend date, the investor can make a complete exit by selling the purchased shares of the company. This move would effectively ensure that the name of the investor is included in the shareholders’ register of the company, thereby enabling him to receive dividends.
Things to keep in mind when executing the dividend capture strategy
Here’s a brief look at a couple of things that you need to keep in mind when executing the dividend capture strategy.
The timing of the share purchase:
In order for the dividend capture strategy to work accurately, the timing of the share purchase is crucial. Usually, when a company declares a dividend, the share price tends to rise. And so, by delaying the purchase of the shares till the nearabouts of ex dividend date is generally not recommended since the share price is likely to be on a high. Purchasing the shares of the company on the same trading day as the announcement of the dividend is typically considered by many to be the ideal point of entry since you can grab the shares before the price rises.
The share price falls on the ex dividend date:
The share price usually falls on the ex dividend date. In such a case, there are technically three options in front of you.
- Sell the shares as soon as the market opens on the ex dividend date. This way, you can minimize the price fall to a certain extent and still get to enjoy a part of the dividend payout.
- Wait for the share price to bounce back up. If the share price goes below the price at which you purchased them, you can wait for a few days for it to bounce back up before selling off your holdings.
- Hedge your stock position using futures or options. You can use the futures or options contracts of the stock to protect you from the inevitable downside on the ex dividend date.
One of the primary advantages of the dividend capture strategy is the sheer simplicity involved in executing it. Unlike most other investment strategies, the dividend capture doesn’t require you to use any complex formulas and techniques such as fundamental analysis or technical analysis. All that it needs is proper timing with respect to the purchase and sale of the shares. When done right, this strategy can turn out to be quite lucrative.