The Dividend Capture Strategy | Basics, Examples, Risks & Advantages

Up to date on October twenty seventh, 2023

At Certain Dividend, we imagine that the very best funding technique is to establish high-quality corporations with robust enterprise fashions which have paid dividends for lengthy intervals of time. An excellent instance of such names is those who have earned the title of Dividend Aristocrat, that are these S&P 500 corporations with a minimum of 25 years of dividend development.

You may obtain our full listing of the 67 Dividend Aristocrats, together with necessary metrics equivalent to dividend yields and market capitalization, by clicking on the hyperlink under.

The Dividend Aristocrats have efficiently navigated a number of recessions whereas rising their dividends on the identical time. Dividend development throughout financial expansions is one factor, however elevating funds throughout a downturn is an indication of an organization that has items or providers that prospects want even in a recession.

Proudly owning shares of this sort for lengthy intervals of time whereas reinvesting the dividends to amass extra shares is our most popular approach to purchase wealth.+

Whereas we usually comply with a long-term funding technique, we imagine it is very important think about varied different paths that may result in monetary freedom.

This text will study the dividend seize technique, the benefits, and dangers of the technique, and supply a number of examples of shares that may very well be a great way for the investor to make the most of this technique.

Dividend Seize Technique – The Fundamentals

The primary merchandise that traders within the dividend seize technique must know is that this funding philosophy facilities across the dates related to the dividend, together with the declaration date, the ex-dividend date, the date of report, and the pay date.

Most traders are already conversant in these dates, however a fast overview may be useful within the dialogue of the dividend seize technique.

The declaration date is the date that the board of administrators pronounces {that a} dividend will probably be paid. The opposite dates necessary to the dividend and the quantity paid are additionally acknowledged.
The ex-dividend is the date that the inventory trades with out the dividend being paid. Buyers must personal the inventory previous to this date to be entitled to the subsequent dividend fee. The dividend to be paid can be mirrored within the share value as it’s accordingly decreased by the quantity of the dividend on this date.
Date of report is the day that the corporate information the shareholders which are eligible to obtain the dividend.
Pay date is the day that shareholders obtain their dividends.

Of those dates, an important to these utilizing the dividend seize technique is the ex-dividend date. The idea of the complete dividend seize technique is that the inventory should be bought earlier than this date, or the dividend is not going to be paid to that investor.

The safety can then be offered on the ex-dividend or after, and the investor will nonetheless obtain the dividend on the pay date.

In principle, the value of the safety ought to fall by the quantity of the dividend on the ex-dividend date, as these traders is not going to obtain the fee. For instance, the investor purchases shares of firm ABC at $50, and the subsequent dividend fee is $1.00. This could consequence within the share value opening at $49 for ABC.

However this isn’t at all times the case in real-time. Suppose the investor waits to see the market’s response to the inventory, and shares ultimately rally to $49.50. The investor then sells their place. When the dividend is distributed a number of weeks later, the investor has a complete revenue of $0.50 per share because the $0.50 loss per share from promoting solely partially offsets the $1 dividend.

Benefits of the Dividend Seize Technique

As a result of the dividend seize technique relies totally on the ex-dividend date, one of many chief benefits of the technique is that it is vitally easy. Dividend seize may be executed with any inventory that pays a dividend, offering, in principle, virtually limitless methods to safe dividend revenue.

The investor can merely make an inventory of shares that pay a dividend and the upcoming ex-dividend. This could present a street map of what securities to purchase, what day to make the acquisition, and the sale.

And since the place is offered on the ex-dividend date or shortly thereafter, the variety of dividends to be acquired can result in sizeable revenue ranges. The investor doesn’t have to attend each three months to obtain their subsequent fee as they might usually do in the event that they had been a long-term proprietor of the place.

On this case, dividend seize can imply a number of dividend funds virtually any day the market is open. These dividends can then be added to the funding sum, which might buy extra shares and, thus, extra dividend revenue.

The dividend seize technique may be profitable even when the investor has restricted funding funds. Admittedly, long-term dividend development investing can take years, if not many years, and huge quantities of capital to achieve success. Dividend seize can generate excessive ranges of revenue utilizing minimal quantities of capital because the investor has extra alternatives to obtain funds.

As a result of traders are specializing in simply the subsequent dividend fee, there may be very restricted threat related to a possible dividend lower. Even when the corporate cuts its subsequent dividend, the inventory is owned solely earlier than and after the ex-dividend date. Shareholders are entitled to the complete dividend fee that was declared.

Whereas we stress realizing what you’re shopping for earlier than doing so, this technique can restrict the period of time wanted to analysis potential investments or look forward to an ideal entry level. Buyers would as an alternative focus their power on creating an inventory of shares to personal and realizing the upcoming ex-dividend date.

Valuation isn’t as necessary because the holding interval is probably going a number of days as an alternative of months or years, and due to this fact the danger of shopping for a safety at elevated ranges is much less of a priority. The worry of shopping for a inventory at its absolute peak isn’t a threat that dividend seize traders must be targeted on.

Lastly, let’s return to our instance of firm ABC. Let’s say that ABC had some optimistic information that coincided with the ex-dividend date say an analyst’s improve or an organization announcement that it was making a major acquisition. The inventory value may rally additional. If the share value on the time of promoting had been above the acquisition value, then the investor would see the income from that in addition to the dividend when it was paid a number of weeks later.

Dangers of the Dividend Seize Technique

Whereas the benefits of dividend seize seem like nice, there are additionally some clear dangers related to the technique.

Returning to our instance of firm ABC, there may very well be information on or across the meant time of promoting, both to the market basically or the inventory particularly, that causes a unfavorable market response. As a substitute of declining by simply the $1.00 dividend on the ex-dividend date, ABC may fall far more than that.

If the investor offered the inventory at $45, then the loss can be $4.00 per share after including the dividend fee, which might imply a discount in out there funds to speculate for the subsequent buy. Assuming the out there capital for funding is already restricted, this might be a serious setback.

Whereas researching the corporate’s fundamentals won’t be a serious precedence, profitable implementation of the dividend seize technique requires curating an inventory of investments that will take time and planning. A date to purchase and promote would must be established to make the subsequent buy.

In essence, this technique requires the investor to be a day dealer, which may be tough beneath regular situations, however particularly painful on days when shares are down considerably. Veering from the deliberate shopping for and promoting dates can result in lacking ex-dividend dates and future funds.

Dividend seize removes most of the tax breaks that long-term holders of inventory take pleasure in. This doesn’t apply to tax-deferred accounts however does to taxable accounts. For a dividend to be often called a professional dividend, the underlying inventory should be held for a minimum of 60 days throughout the 121 days earlier than the ex-dividend date. The tax fee of a professional dividend is 15%.

Since few dividends acquired beneath this technique will probably be thought-about certified, they’re taxed on the investor’s regular revenue tax fee. In all chance, the non-qualified dividend will probably be taxed at the next fee whatever the tax bracket.

Examples of the Dividend Seize Technique in Motion

There are many choices to select from as many corporations pay dividends, however these with low yields would probably not be ideally suited candidates because the revenue acquired wouldn’t justify the danger.

Identical with the lower-yielding however greater development shares, equivalent to Apple Inc. (AAPL) or Microsoft Company (MSFT). A majority of these shares don’t provide a lot in the best way of dividend revenue, so traders would wish to make sure that the share value would rally on the ex-dividend date to revenue from these names. That may be a vital threat as high-growth shares are inclined to have extra draw back potential when markets fall.

Due to this fact, traders wishing to comply with this philosophy most likely want to contemplate higher-yielding shares. After all, with greater yields usually come greater dangers. Whereas dividend seize does restrict the influence of dividend cuts, higher-risking securities may also have outsized strikes to the draw back, placing the complete technique prone to failing.

With a view to restrict general threat, we imagine that these following this technique goal high-quality names with robust enterprise fashions and many years of dividend development, as they’re usually seen because the extra secure of investments.

Figuring out names with a low beta would even be necessary. There won’t be as a lot upside potential within the inventory on the ex-dividend date, however this might additionally restrict a steep discount within the share value even when the market has a extreme down day on the deliberate time of promoting.

One instance that meets all of those standards is AbbVie Inc. (ABBV). AbbVie was spun off from guardian firm Abbott Laboratories in 2013. Since then, the corporate has produced very robust outcomes, chatting with the energy of its enterprise.

In the present day, AbbVie focuses on one important enterprise section—prescription drugs. It focuses on a number of key remedy areas, together with immunology, hematologic oncology, neuroscience, and extra.

Supply: Investor Presentation

Together with the time it was a part of Abbott Laboratories, AbbVie has raised its dividend for 51 consecutive years, making the corporate a Dividend King.

AbbVie can be within the healthcare sector, which is often one of many extra secure areas of the financial system. This sector is often in favor even in periods of financial misery, which might present stability in a recession.

Actual property funding trusts, or REITs, may very well be good candidates for the dividend seize technique as they’re required by legislation to pay out a minimum of 90% of revenue within the type of dividends to traders. In consequence, shares on this sector usually have elevated yields.

Take Realty Revenue (O), for instance. The inventory yields 6.1%, which is greater than thrice the common yield of 1.7% for the S&P 500 Index. Realty Revenue has raised its dividend for over 25 years, which makes it a Dividend Aristocrat.

Supply: Investor Presentation

And whereas most corporations pay their dividend quarterly, Realty Revenue pays dividends every month.

A dividend seize technique may work greatest with an organization that distributes month-to-month funds, because the ex-dividend dates are often comparable month to month. There are lower than 80 month-to-month dividend-paying shares, so the alternatives are restricted.

Realty Revenue has earned the nickname The Month-to-month Dividend Firm attributable to its greater than 1 / 4 century of creating month-to-month funds.

Shareholders have acquired greater than 600 month-to-month funds, and the belief has raised its dividend over 100 instances since Realty Revenue went public in 1994.

Ultimate Ideas

Lengthy-term dividend development investing is the most well-liked income-focused technique, however the dividend seize technique does have its positives. This technique can present the next frequency of dividend funds and could be a useful gizmo for these with restricted funding capital to create revenue.

That stated, this technique requires nice consideration to the necessary dates related to the dividend, significantly the ex-dividend date. An investor must be very disciplined when shopping for and promoting securities to maximise dividend seize possibilities of success. This entails the danger of a loss and forfeits any tax advantages associated to the long-term holding of securities.

Lastly, if the investor had been to pursue this technique, we might stress that they concentrate on high-quality corporations, the identical that we propose long-term traders buy. Because of this, plus the dangers concerned with dividend seize, we firmly imagine that long-term dividend development investing is the very best to construct wealth.

The next articles comprise shares with very lengthy dividend or company histories, ripe for choice for dividend development traders: