- Dividend capture requires investors to take advantage of the dividends that a company will pay out to its shareholders. Timing is a critical component of dividend capture. In order to take advantage of the possible payoff, the investor must know the dates that the company will announce a dividend payout to its shareholders. The process involves finding a dividend paying stock and the dividend ex-date. The investor then purchases the stock before the dividend ex-date and sells the stock on the day after the dividend ex-date.
- A key strategy in understanding dividend capture is to understand the dates associated with a dividend payout. The dividend declaration date is the date when directors of a company declare a dividend. Another key date is the ex-dividend date. On this date, the price of the stock in question will lower by the amount of the dividend. This strategy requires investors to capture the dividend by buying the stock before this ex-dividend date.
- You can also maximize your profits when implementing a dividend capture strategy by holding the stock for 61 days. Holding the stock for 61 days decreases the rate at which you will have to pay tax on the profits from the transaction. If you sell the stocks before the 61-day period, the Internal Revenue Service requires you to pay tax on the dividends or profit as ordinary income. If on the other hand, you hold the stock for at least 61 days, the maximum tax rate for the transaction is 15 percent.
- Although dividend capture might sound simple, many scenarios can result in a significant loss of money. For example, the share price of the company could drop dramatically before you can sell the stock. The dividend payouts would then not compensate for the drop in the price of the stock causing you to lose money. Additionally, companies are not legally required to pay dividends. This can result in a loss if you use this strategy and the company does not declare a dividend.
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