What is a Dividend Capture?

A dividend capture is a strategy of buying and selling stock that are almost ready to declare a dividend. Generally, a publicly-traded corporation will declare its dividend on a certain date, and then say that dividend is payable to all shareholders of record on a certain future date. Those who try to buy the stock solely to get paid a dividend, then sell, are said to be engaging in a strategy of dividend capture, or trading dividends.

Usually during a meeting of the board of directors, a corporation will present its earnings on a quarterly basis. Then a dividend payment will be authorized, if the company had a profitable quarter. An announcement of that will then be made public through a press release or press conference. Larger companies will have this news widely reported by financial publications and television stations geared toward business news.

For example, Widget Inc. may announce a $1 US Dollar (USD) dividend payment on 1 June. This may be paid on 30 June to all shareholders of record on 15 June. The 15 June deadline is called the ex-dividend date -- the date at which shareholders can no longer collect a dividend payment. Thus, those who wish to try to engage in dividend capture will be lining up near the close of the day on 14 June to try to buy this particular stock.

The key to profiting using a dividend capture strategy depends on being able to sell the stock at the price the trader paid, or at a price that is not substantially lower than what was paid. In order to do this, traders often want to wait as long as possible before buying to avoid major market fluctuations. The only problem with doing so is that when a stock goes ex-dividend, that payment is subtracted from the stock's value. Therefore a stock trading at $50 USD, after the ex-dividend date, will be valued at $49 USD. Those who use a dividend capture strategy are betting that the stock's real value is closer to what the number was before the ex-dividend date and that the stock will rebound and increase in value in a relatively short amount of time.

While the dividend capture strategy is promoted in some books as a way to get rich quick in the stock market, many financial advisers strongly recommend against this strategy. It would take a substantial amount of studying, and some luck, to come up with stocks that consistently would retain their value enough to make this strategy worthwhile. Further, a market that fluctuates wildly would make employing a dividend capture strategy even more difficult.