Dividend Capture

A dividend capture strategy is a timing-oriented investment strategy revolving around the purchase and sale of dividend-paying stocks. Dividend capture is specifically the practice of buying a stock just prior to the ex-dividend date in order to capture the dividend, then selling it immediately after the dividend is paid. The purpose of the two trades is simply to receive the dividend, as opposed to selling at a profit.

Many corporations engage in dividend capture strategies because of the limited amount of tax that they must pay on the dividend income of other corporations. Dividend capture is synonymous with trading dividends. It should be noted that many financial planners frown on this strategy for individual clients; the amount of time, research and trading commissions necessary to do it successfully often offsets any profits received.

Although this strategy makes theoretical sense, after taxes and trading cost, it is far less practical for all but a handful of investors who enjoy certain tax or transaction cost benefits. For the income-oriented investor, this seems a semi-easy method to produce income with little capital loss exposure, as a stock is held for a very short period. However, stock exchanges automatically negatively adjust the stock's price on the ex-dividend date to reflect the upcoming payout. Thus, this strategy requires precise timing to buy the stock at an appropriate level, hold it for a short time, collect the dividend and sell with little transaction cost. In other words, a lot has to go right to make a buck.

One way to test the viability of the dividend capture strategy: If this were profitable, computer-driven investment strategies would have already exploited this opportunity.