Dividend Capture Strategy
Dividend Capture Strategy
Dividend Capture StrategyThe dividend capture strategy is based on an investment technique that focuses
on quickly capturing the dividend issued by a corporation,
stock trading tips without intending
to hold the investment over a long period of time. The dividend timeline below
illustrates the four dates investors must understand and monitor in order to
effectively implement the dividend capture strategy.
Share:In
contrast to other more common dividend income strategies that center on holding
stable dividend paying stocks to generate a steady income stream,
stock market tips dividend
captures typically are executed with a short term time horizon where the
underlying stock could sometimes be held for only a single day. The basic
dividend capture strategy involves purchasing shares of stock prior to the
ex-date followed by a subsequent share sale. Prior to the ex-date,
operator stock trading tips the stock
price reflects the expected dividend payment. Because investors purchasing the
stock market on the ex-date no
longer receive the dividend, the share price should theoretically fall by the
price of the dividend amount. In practice this does not always happen. Depending
on the price movement, share tips are
then sold immediately on the ex-date or when the price bounces back to its
original value. One of the primary advantages of the dividend capture approach
to trading is that there are numerous companies that pay dividends on a daily
basis. Therefore, a large holding in one stock can be rolled over regularly into
new positions, trading strategies capturing
the dividend at each stage along the way. With a substantial initial capital
investment, investors can take advantage of small and large yields as returns
from successful implementation are compounded frequently. Although theory would
suggest that the price jump would amount to the full amount of the dividend,
insider trade India general market volatility plays a significant role in
the price effect of the stock. Dividends collected with a short term dividend
capture strategy fail to meet the necessary holding conditions to receive the
favorable tax treatment and are therefore,
trading tips taxed at the investor's ordinary income tax rate.
Transaction costs further decrease the sum of realized returns. When transaction
costs to purchase and sell the securities amount to $25 both ways,
operator share tips a substantial
amount of stocks must be purchased simply to cover brokerage fees. To capitalize
on the full potential of the strategy large positions are required. As addressed
in the above discussion, insider
information the potential gains from a pure dividend capture strategy
are typically small while possible losses can be considerable if a negative
market movement occurs within the holding period. A drop in stock value on the
ex-date which exceeds the amount of the dividend may force the investor to
maintain the position for an extended period of time,
stock tips introducing
systematic and company specific risk into the strategy. Adverse market movements
can quickly eliminate any potential gains from this dividend capture approach.
Such risks are present with all trading/investing strategies. In order to
minimize these risks, trading strategies
should be focused on short term holdings of large blue chip companies.
by: shimran