The next day, when the stock goes ex-dividend, you'll collect $100 in dividend payments. The net outlay to enter the position is $975. ![]() Assuming this option is worth $5.25, you'll rake in $525 for the sale of the option, while shelling out $1,500 for the purchase of the stock. To take advantage, you could buy 100 shares of XYZ and write a 10-strike call. The call options should be in the money by a healthy amount to ensure they move in close concert with the underlying shares.įor example, let's say XYZ is trading at $15, and it's about to go ex-dividend for $1.00 per share. To play the dividend capture, you'll buy shares of a stock just ahead of the ex-div date, and simultaneously write covered calls against those shares. This options tactic is an arbitrage play, as it's meant to capitalize on minor pricing blips that occur as the result of stocks going ex-dividend. Book value is declining since the dividends paid out exceed earnings, and the stock price will track it lower.Have you ever noticed a stock getting swarmed with heavy call selling activity just ahead of its ex-dividend date? If so, it's possible that you're witnessing the execution of a dividend capture strategy. Over several years, assuming no growth in earnings, the stock will actually decline in value since the dividend is what's known as a "destructive return of capital". If the stock is trading at $10 per share, then after one year the price will have been reduced to $9 by ex-dividend date adjustments while the book value (a rough tracking measure of intrinsic value) of the company will have only increased by $0.50 (retained earnings per share) to $9.50. Suppose a company pays a $1 per share annual dividend but only generates $0.50 per year in earnings (a 200% payout ratio ). That's because the company's share price gets reduced by the amount of the payout, meaning that it's essential that a dividend be sustainable otherwise the share price will actually fall over time. The other important implication of ex-dividend dates is that unsustainably high dividends are not a good thing for long-term shareholders. Thus we recommend conservative income investors avoid the dividend capture strategy. Or to put it another way, dividend capture is just another term for short-term trading which studies show almost no investors can do profitably over the long term. In our opinion, any profits gained from dividend capture are purely due to short-term luck and have nothing to actually do with the dividend itself. Given the broad appeal of dividend investing, if this strategy actually had merit, not only would many more investors be doing it, but almost certainly any profitable edge the strategy had would be competed away. However, as with most things in life, if it sounds too good to be true, it usually is. No one knows.Ī dividend capture strategy is simple to execute and looks appealing in theory. ![]() Perhaps the broader market begins selling off, or maybe a company-specific issue crops up to push the stock lower. Short-term stock price movements are influenced by many different dynamic factors that cannot be reliably forecasted. For one thing, the investor incurs higher trading commissions and potentially short-term capital gains taxes which eat away at any gains.įurthermore, no one can consistently predict how a stock will trade on or after its ex-dividend date. There are a number of other issues with the dividend capture strategy, too. On the ex-dividend date the share price should be reduced by the special dividend amount, meaning there is no benefit to investors. ![]() Dividend capture can seem extremely appealing in the case of special dividends, which some investors mistakenly think they can take advantage of to make a quick 10+% profit by capturing this payment.
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