Dividend Capture Strategy

Dividend capture is a trading strategy that attempts to profit by purchasing shares before the ex-dividend date to receive the dividend, then selling shortly afterward. While appealing in theory, the strategy faces significant practical challenges.

How Dividend Capture Works

1. Buy before ex-date: Purchase shares at least one business day before ex-dividend date 2. Receive dividend: Become shareholder of record and qualify for payment 3. Sell after ex-date: Exit position, ideally before price declines further 4. Repeat: Move to next dividend opportunity

Why It Rarely Works

Price Adjustment: Markets are efficient. On the ex-date, share price typically drops by approximately the dividend amount. A $1 dividend usually means ~$1 price decline.

Transaction Costs: Commissions, bid-ask spreads, and market impact erode potential profits.

Tax Inefficiency: Dividends held less than 60 days are taxed as ordinary income (up to 37%), not qualified dividends (0-20%). You may also generate short-term capital gains.

Holding Period Risk: While waiting for the dividend, the stock may decline beyond the dividend amount.

Mathematical Reality

Example with $100 stock paying $1 dividend:

• Buy at $100
• Stock opens at $99 on ex-date (price adjustment)
• Receive $1 dividend
• Net position: $99 + $1 = $100 (break-even before costs)
• After taxes and fees: Net loss

When Capture Might Work

• Tax-advantaged accounts: No dividend tax impact
• High-volatility recovery: If price recovers quickly past ex-date
• Systematic scaling: Professional traders with low costs and sophisticated execution
• Options enhancement: Using options to hedge or enhance the strategy

Alternative Approach

Rather than chasing dividends, focus on:

• Quality companies with sustainable dividend growth
• Total return, not just dividend income
• Tax-efficient dividend funds (like SCHD)
• Long-term compounding through dividend reinvestment