Wouldn’t it be nice to collect dividends every single day? That’s exactly what some traders aim to do. 

Unlike regular dividend investing, which is focused on long-term stocks, some traders try to profit from holding stocks for short periods, just enough to pocket the dividend. 

This is known as the dividend capture strategy. In this post, we’ll explain how this trading strategy works, give a real-world example, and outline advantages and disadvantages as well as some alternatives. 

Dividend Terms Every Investor Should Know

Before we go into the specifics of trading stocks to capture dividends, let’s make sure we’re on the same page about some important terms. 

For each dividend, there are several key dates to know:

• Declaration date: That’s when the company’s board of directors announces a dividend. Each company follows their own corporate calendar and usually announces dividends with quarterly or annual earnings reports or through a separate press release. The announcement also includes the record date. 
• Record date: This is the day the company will check its list of shareholders to determine who gets the dividend. 
• Ex-dividend date: This date is set according to stock exchange rules and usually one business day before the record date. If you buy on this day or later, you won’t get the dividend. 
• Payment date: This is the day when investors receive the dividend. This is usually a couple of weeks after the record date.

So the order is as follows: The company announces the dividend on the declaration date. At any point before the ex-dividend date, investors can buy the stock and get the next dividend. On the record date, the company takes a snapshot of its shareholders and then sends them the money on the payment date.

How the Dividend Capture Strategy Works 

In theory, on the ex-dividend date, the share price should fall by the amount of the dividend. The idea is simple: Buyers on that day won’t get the dividend payment so they’ll pay less for the stock than the people who bought the day before and will collect the dividend. 

In practice, this often doesn’t always happen. Lots of other factors affect the share price every day: the overall stock market trend, macroeconomic news, and of course the demand and support for the stock. 

As a result, the share price might decline by a smaller amount than the dividend, not decline at all, or even rise. 

If that’s the case, it would be profitable to buy the stock right before the ex-dividend day and sell immediately after the record date, collecting the dividend payment on the payment date. 

This is the dividend capture strategy. 

It’s not even necessary to hold until the payment date. As long as you held the shares on the record date, you’ll get the payment. 

While this trading strategy can work for any stock, it’s best to use it for high-quality dividend stocks. These blue-chip companies have predictable dividend yields and lower price volatility. So on an ex-dividend date, there might still be enough demand for the shares to push the price enough to make the strategy profitable. 

Instead of buying individual stocks, you could also buy exchange-traded funds that pay dividends. The strategy is the same, but the risks could be lower if the ETF’s share price is less volatile. 

Let’s take a look at an example to see how dividend capture works in practice.

Divided Capture Example: PepsiCo

On May 4, 2021 the declaration date, PepsiCo, Inc. (NASDAQ:PEP) announced a quarterly dividend of $1.075. 

June 4 was the record date, and so June 3 was the ex-dividend date. So the last opportunity to buy the stock and still collect the dividend would have been right before market closing on June 2. 

Let’s imagine you went ahead and snatched some shares as the trading closed at $148.22 per share. The next day, the price dropped and closed at $147.67 — that’s when you sold your stock.

Then, on June 30, the pay date, you received the dividend of $1.075. 

Your total profit was: $148.22 – $147.67 + $1.075 = $1.625

To calculate the return, you can divide the profit by the original investment: $1.625 / $148.22 = 1.09% for holding the stock for one day. 

Boosting Dividend Capture With Options

Selling call options would be an advanced version of the dividend capture strategy. As with a regular covered call strategy, you would write (i.e., sell) a call option for the stock you hold. The income from the premium would supplement the dividend. 

Then, if the share price indeed would go down, the value of the call option you wrote should decline (unless the volatility surged, making all options more valuable). In some cases, you would be able to buy back the call option for less than what you originally got as a premium.

Of course, this is just an example and there is never a guarantee that the stock would plummet on the ex-dividend date by more than the dividend amount. 

That’s why it’s important to also understand the risks of this strategy. 

The Pros and Cons of the Dividend Capture Trading Strategy

At first look, the dividend capture strategy looks great. Why wait and hold the stock for months or years if you can just hold it for a day and still get the dividend?

Of course, the actual execution isn’t as straightforward, as you’ll see in a moment.

So, the advantages of this trading strategy are clear: 

• Quick returns: You only hold the stock for a day, so you don’t tie up capital and can enter lots of trades over a very short term. 
• Lots of opportunities: Almost any day is an ex-dividend date for some stock. There are plenty of free calendars that can help you find the next dividend opportunity.
• No advanced analysis: While this strategy is more suited to high-quality stocks with lower volatility, it doesn’t require any in-depth fundamental analysis or advanced charting. 

Disadvantages might be less obvious, but they are numerous: 

• Unpredictable returns: If these returns would be easy and predictable, algorithmic hedge funds would have already arbitraged away this opportunity.
• Day trader label: Based on FINRA’s rules, your brokerage would only allow you to make three day trades within a five-day window, or you’ll be labeled as a day trader and will be required to maintain a minimum account balance of $25,000.
• Volatility could tie up capital: If the price falls by more than the dividend, you’ll either have to take the loss or wait for the price to reach your breakeven point, which would tie up capital you might have used for other trades.
• Inferior tax treatment: While regular long-term dividend investors benefit from lower tax rates, dividend capture gains would be treated as regular income. 
• Transaction costs could add up: Today, many brokerages offer commission-free trading, but you might still have some costs, for example, if you use leverage. 

As you can see, it’s not a passive, low-risk investment strategy. It generates income but requires lots of active day trades. While some traders make money with this strategy, it could be argued that it is because we are still in the longest bull market in history. 

Build Your Dividend Income 

We’ve reviewed the timeline for dividend announcements and payments and saw how this creates an opportunity to capture dividends by holding the stock for just a day or two. We then looked at the advantages and drawbacks of the dividend capture strategy. 

While this strategy isn’t difficult, not everybody has the time (and nerves) to actively day trade. For most people, it would be easier and safer to build and hold a solid portfolio of stocks with healthy dividend yields. If you want to learn how to find stocks that you’ll never want to sell, sign up for Investors Alley’s Dividend Hunter newsletter.