The investment technique of buying a stock to earn an upcoming dividend is called the dividend capture strategy. If you know a company plans to pay an attractive fourth-quarter dividend, you can use this strategy to earn the dividend with a short holding period for the stock. The basic steps of dividend capture are easy to understand. However, to realize the profit potential of the pending dividend takes some additional planning.
Watch the news releases from the company in which you plan to employ the fourth-quarter dividend capture. The company will announce each dividend payment with the amount of dividend, record date and payment date. The payment of a future dividend is not official until an announcement is made that the dividend will be paid. Dividend announcements are usually released several weeks before the record date, but some companies announce dividends just a few days early. Review the dividend announcements from past years to develop an understanding of the timing used by the stock you want to buy.
Buy shares of the company at least three business days before the listed record date. A stock goes "ex-dividend" two days before the record date, and investors who buy on the ex-dividend date or later will not receive the dividend.
Hold the shares in your brokerage account until at least the ex-dividend date. At that point, you will become a shareholder of record and the dividend amount will be deposited in your brokerage account on the listed payment date.
Sell the shares at any time on or after the ex-dividend date. You do not need to continue holding the shares until the payment date. It is important to know that the share price will decline by the amount of the dividend at the start of trading on the ex-dividend date. To earn the amount of the dividend, you must wait until the share price recovers from the ex-dividend drop up to your purchase price before selling the shares.
- Many dividend-paying companies allow you to sign up for news release email alerts through their investor relations web pages. Use this service to make sure you do not miss a dividend announcement.
- Study the stock's historic price patterns around the ex-dividend date to find the best time to buy and sell shares and not lose money from the ex-dividend price drop. The stock price of each individual stock will react differently to dividend announcements and payments.
- When the dividend you want to earn meets the requirement for a qualified dividend, the tax rate on the dividend earnings will be lower if you meet the required holding period. To maintain the qualified dividend status you must own the shares for at least 61 days in the 121-day period centered on the ex-dividend date. Plan your buy and sell dates to make sure you hold the stock for at least 61 days.