Lux Investing

Does the Dividend Capture Investing strategy work?

Public Comments

1. Simple answer: You buy a stock just before it goes ex-dividend. Hold it until after the record date. You collect the dividend and hold the stock only a few days. If you do this with several dividend paying stocks you can collect many more dividends than the usual 4 times a year with the same cash investment. Problem: Stock prices fall by the amount of the dividend on the ex-dividend date. Dividend capture advocates study the historical stock prices to determine how long the stock takes to recover the price loss due to the dividend. Also, commission costs can really add up with the strategy.
2. Dividend capture used to be a strategy corporate tressures used to employ in the 80's to improve their returns and cost of capital. They used to employ Options for this purpose since on getting dividend the stock price tend to loose the same amount. So they used to sell many calls;at the same time when they bought stocks to capture dividend close to dividend announcement dates. This created problems in the stock market and is attributed as one reason for the 87 carash. After the crash the Finance community decided to stop employing this strategy for stabilising future market movements. It works and I have dome many projects on this when I was an MBA student those days. In those days they also decided to forefeit using 'Portfolio inssurence' which was also destabilising the stock markets.
3. Not really. Aside from the fact that the price usually drops to compensate for the dividend, you have high transaction costs. But the biggest problem is that the dividends you recieve will be taxed as ordinary income unless you hold the stock 60 days. So add up the risk of a price drop, transaction cost, and tax effect, and what do you get? There's no free lunch.