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A dividend is a sum of money paid by a business to its shareholders, typically taken from its profits. Investors seek dividends for a steady income and potential stock growth. Beyond this traditional investment approach, there’s a method to earn quick profits from these dividend-paying stocks, known as the dividend capture strategy.
To learn how this strategy may be leveraged for quick gains, keep reading.
Dividend capture strategy– What is it?
The dividend capture strategy is an investment approach tailored for those looking to benefit from company dividends in the short term. It means purchasing a stock shortly before the dividend payment date and selling it immediately thereafter. The goal is to own the stock long enough to qualify for the dividend without committing to a long-term investment.
Some countries offer dividend capture strategy ETFs (Exchange-traded Funds) designed to deliver consistent income streams to investors. These ETFs hold a basket of stocks and strategically collect dividends to maximise returns.
Dividend timeline
Let’s go over some important dates before we begin discussing the dividend capture strategy.
- Date of dividend declaration: The board of the firm will announce the dividend distribution amount and plan on this day. At this point, they’ll also reveal three more crucial dates.
- Ex-dividend date: This date indicates the final day to qualify for the subsequent dividend payout. You will not be qualified to receive the dividend if you purchase company stock on or after this date.
- Record date: The company compiles the list of eligible shareholders on this day to distribute dividends.
- Date of payment: On this date, eligible stockholders will receive their dividend payments.
How is the dividend capture strategy implemented?
Consider the case of ZZZ Corp, which announces the following dates:
- Dividend declaration date: February 1, 2024
- Ex-dividend date: February 15, 2024
- Record date: February 17, 2024
- Dividend payment date: February 29, 2024
An investor interested in the dividend capture method with ZZZ Corp’s stock would proceed as follows:
- Buying the stock: The investor can purchase shares of ZZZ Corp on Feb 14, 2024, any day prior to the ex-dividend date. Note, that the dividend distribution is only available for purchases made before the ex-dividend date.
- Holding through the ex-dividend date: The investor holds onto the shares through the ex-dividend date, Feb 15, 2024.
- Selling the stock: After the ex-dividend date has passed and you’re recorded as the stock’s owner, the investor can sell the shares on the next trading day, say Feb 16, 2024. The sale is made after the ex-dividend date, ensuring the investor’s eligibility for the dividend.
- Receiving the dividend: On the dividend payment date, Feb 29, 2024, ZZZ Corp distributes the dividend. Despite no longer owning the stock, the investor receives the dividend because they were the stockholder on the ex-dividend date.
Drawbacks and considerations
The dividend capture strategy in India appears straightforward and promising at first glance:
- Identify a dividend-paying stock.
- Purchase it before the ex-dividend date.
- Collect the dividend.
- Sell the stock afterwards.
However, there are risks associated with this tactic.
For instance, consider the same example ZZZ Corp, which has its stock priced at ₹100 and announces a ₹10 dividend. An investor buys shares worth ₹10,000, aiming for a ₹1,000 dividend.
After the ex-dividend date, it’s common for a stock’s price to drop, often by the dividend’s amount. Yet, the drop can be more significant, like ₹15 instead of ₹10 for ZZZ Corp, leaving the stock at ₹85.
This reduction can lead to losses, outweighing the dividend gain. Thus, if the investor then sells at ₹8,500, they incur a ₹500 loss despite the dividend, impacting their investment capital.
Given these risks, investors have a few strategies to mitigate potential losses:
- Sell early: Selling the shares as the market opens on the ex-dividend date might limit losses while securing a portion of the dividend.
- Wait for a recovery: If the stock price drops below the purchase price, waiting for a rebound before selling could be beneficial.
- Hedge the investment: Using the dividend capture strategy with options or options to hedge the stock can protect against significant losses on the ex-dividend date.
Special dividends are an additional factor to take into account. These payouts are typically higher than regular dividends and have more profit potential. For example, TCS announced an interim dividend of ₹9 and a special dividend of ₹18 per share.
Despite potential share price drops, the substantial nature of special dividends can offer a buffer, allowing an investment strategy to withstand market fluctuations more effectively.
Bottomline
While the dividend capture strategy in India offers a path to quick profits through strategic buying and selling around dividend dates, it carries inherent risks and requires careful planning.
Despite all of this, it can be a viable strategy for investors if they take the proper measures and take market dynamics into account.
FAQs
Although the dividend capture tactic has a certain degree of success, its efficacy varies greatly. Using this approach, investors purchase stocks before the ex-dividend date to get dividends, and they sell them quickly thereafter in an attempt to make rapid profits. It’s crucial to remember, though, that changes in stock price on the ex-dividend date frequently offset dividend payments. The approach also necessitates exact timing and in-depth knowledge of the industry.
Consider a potential investor who is drawn to ABC Limited due to its upcoming ₹5 dividend per share. The ex-dividend date is set for March 10th. To qualify for the payout, the investor strategically buys shares of ABC on March 9th. Once the ex-dividend date passes, they are now eligible for the ₹5 dividend. They can then choose to sell their shares on March 11th or any day after, aiming to capture the dividend as their primary return.
For further risk management, think about combining options with the dividend capture strategy. As is customary with this method, the stock must be purchased prior to the ex-dividend date. However, you can also use options as a hedge against any price declines over the holding period. It lets you take advantage of the dividend while having a safety net in place to mitigate the risk of stock price fluctuations.
The three important dates for dividends are:
Ex-dividend date: The cutoff date to be eligible for the upcoming dividend. You must own the stock before this date to receive the dividend.
Record date: The company’s deadline to determine which shareholders are eligible to receive the dividend.
Payment date: The day when the dividend is paid out to the shareholders who were on the company’s books on the record date.
The dividend is still payable even if you sell your shares at any point after the ex-dividend date. The key is that you must own the shares before the ex-dividend date to qualify for the dividend. Once the ex-dividend date passes, and you’re officially on the company’s records as a shareholder, you’re entitled to the dividend, regardless of whether you still hold the shares when the dividend is paid out.