Dividend Capture: A New Look

Harry Domash  |

On September 10, Microsoft Corporation (MSFT) will pay its regular $0.31 per share quarterly dividend. But did you know that you’d only have to hold Microsoft shares for one day, August 17, to collect that payout? That is, you could buy shares on August 17, sell them on August 18, and still collect the dividend.

Here’s how it works: August 18 is the “ex-dividend date” for that dividend. That means that buyers on August 18 are buying the shares “excluding the dividend.” But anyone who bought before August 18, and didn’t sell, does get the dividend. You could look up the ex-dividend date for most US-traded stocks on almost any financial website.

That you only need own a stock for one day to collect the dividend has inspired many investors to pursue a “dividend capture” strategy, which involves holding a stock just long enough to collect the dividend, selling at or above their purchase price, and then moving on.

Not That Easy

Of course, it’s not that easy. For starters, theoretically, the share price drops by the dividend amount on the ex-dividend date. But, in fact, many different factors influence a stock’s price movements on any given day, and prices typically don’t drop by the exact dividend amount on the ex-date.

Dividend capture players follow a variety of strategies to “capture” the dividend. Some try to buy before the dividend is announced, some sell on the ex-date, while others wait for a stock to recover to a predetermined price before selling. Dividend capture is a controversial topic and not everybody believes that any capture strategy can be consistently profitable.

All that said, I’ve spent some time analyzing historical data and devised some ideas that, based on limited testing, show promise.

Special Dividends Work Best

Instead of working with regular quarterly payouts, I’ve focused my research on special dividend announcements. Special dividends are one-time payouts that are often much larger than regular dividends. For instance, regular quarterly dividends typically amount to around 1% of the stock’s trading price (yield) compared to 3% or 4%, and sometimes much higher, for special payouts. Those higher yields mean that the dividend effect is less likely to be washed out by daily trading price fluctuations.

Since November 2009, I’ve tracked what I’ve termed “investable” special dividend announcements on my Dividend Detective website. To qualify as for that list, I required either a minimum $2 per share payout, or at least $0.50 per share or a minimum 7% yield (special dividend percent of share price). Using those limitations, only 33 dividends qualified as investable during 2014.

What Works

Using that list, after testing various strategies, I determined that profitable trades require 1) buying either on the announcement date or within two market days after the announcement, and 2) selling on the day BEFORE the ex-dividend date.

Selling before the ex-date sounds counterintuitive because you’re not collecting the dividend. However, share prices often rise leading up to the ex-date. More often than not, you’ll make more money selling before the ex-date, instead of collecting the dividend and then selling at some predetermined later date.

Looking at the 42 qualifying special dividends announced in 2014 and the first six months of 2015, you would have averaged a 2.6% if buying on the first day after the announcement and 2.5% if you bought on the second day.

What Works Better?

Confining your universe to minimum $2/share payouts would have cut your investible opportunities to 27 plays, but upped your return to 3.4% and 2.9%.

What Works Best?

Further limiting your candidate list to minimum $3 dividends would have cut your opportunities to 15 trades, but upped your average returns to 4.7% and 4.2%.

What Doesn't Work?

Focusing on the highest or lowest yielding dividends did not measurably help the returns.

You can see a list of each day’s declared dividends in the news section of Seeking Alpha. Given the limited testing that I’ve done, my numbers are far from the last word.

Try doing your own testing using play money and let me know your results or any improvements that you’ve devised. 


For tips and information on the best utilities and dividend stocks from Harry Domash, please check out Dividend Detective

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer



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