Capture Dividends up to 50% Higher with This Simple Strategy

Would you be interested in a simple investment strategy that allows you to capture more dividends? Savvy income investors can use a neat little trick that does just that. It’s not hard, but it will require a little research. The rewards can be great — you can easily earn yields 50% higher than normal.

How does it work? Basically, this strategy enables investors lock in two additional dividend payments each year for the same investment dollars. Instead of four quarterly dividend payments a year, investors can use this strategy to lock in as many as six dividend payments. And the best part about it? The dividends still qualify for the 15% dividend tax rate.

So what is this simple strategy that can boost dividends?

It’s called the “dividend-capture” strategy.

Dividend capture involves purchasing a stock for its dividend, collecting the dividend, selling the stock, and then using the proceeds to buy another stock ready to pay a dividend. Before getting into the details of how dividend capture works, you need to understand the terminology and sequence of events leading up to a dividend payment.

Understanding dividend lingo
The process begins with a company declaring the date it will pay its next dividend. This is called the declaration date and it is usually announced by a press release. The dividend can only be collected by investors who are registered holders of the stock on a certain date, which is known as the record date. The ex-dividend date usually comes two days before the record date. This is the first day the stock trades without the right to pay a dividend to new shareholders. The dividend payment is made on the payment date, which is typically scheduled four weeks after the ex-dividend date.

Because of how dividend payments are timed, you can purchase a stock one trading day before the ex-dividend date and still collect the dividend, even if you hold the stock for only one day and sell it on the ex-dividend date.

How to use dividend capture…
The main benefit of a dividend-capture strategy is it enables an investor to collect more dividends in a year with the same investment dollars. For example, an investor who purchases a stock paying quarterly dividends receives four dividend payments a year. However, if he purchases a stock before its ex-dividend date and sells it 61 days later (the minimum days you must hold a stock to qualify for the reduced 15% dividend tax rate), the investor would be able to pocket six dividend payments during the year (365 days/ 61 days = 6) instead of the traditional four. That equates to 50% more dividends for the same investment.

As I mentioned, this method only works if you hold a stock for at least 61 days, if you want to qualify for the reduced tax rate. According to U.S. tax rules, you must hold a stock for at least 61 days to qualify for the 15% dividend tax rate. If you sell the stock sooner, your dividend payment may be taxed as ordinary income up to a 35% rate (depending on your tax bracket).

If you want to try a dividend-capture strategy for yourself, you will need a list of stocks going ex-dividend (or a dividend calendar) provides a calendar of stock ex-dividend dates over a period of four weeks. The calendar shows the dividend amount, the ex-dividend date and the dividend payment date. You can also find ex-dividend and payment dates for individual stocks on the Key Statistics page of Yahoo Finance.

Things to keep in mind

Most dividend-capture strategies assume you can lock in capital gains as well as extra dividends, because the price of a stock should rise prior to the ex-dividend date in anticipation of the dividend, drop by the value of the dividend on the ex-dividend date, and rise again with the approach of the next payment date. In other words, a stock paying a $0.25 quarterly dividend and closing at $15.00 one day before the ex-dividend date should trade at $14.75 on the ex-dividend date and rise to at least $15 before the next announcement date.

Some dividend capture strategies recommend purchasing the stock before the dividend announcement, based on the belief that the announcement triggers a rise in the share price. The truth is, however, market forces often overpower the ex-dividend effect and there is no guarantee a stock price will bounce back to pre-dividend levels. For that reason, dividend capture is not a foolproof method for generating capital gains.

However, just because profits aren’t guaranteed doesn’t mean you shouldn’t pay attention to ex-dividend dates when buying a stock. By purchasing a stock a few weeks before the ex-dividend date, or even better, before the dividend announcement date, you benefit from the dividend in the short-term, while possibly owning a stock you like for the longer-term. This strategy combines an immediate return on your investment with the potential for long-term capital gains.

The table above shows upcoming quarterly dividend payments and pending ex-dividend and payment dates for several income stocks. [If you’re one of Carla Pasternak’s High-Yield Investing subscribers, you’ve seen a table like this before.] The Pay/Price column in the table measures the yield an investor would receive from this one single upcoming dividend payment.

Action to Take–> I put together this type of table to measure how a dividend capture strategy would work for me. It takes a little bit of research, and individual yields are usually modest. However, even if I only get an extra 1% to 2% in dividends, every little bit helps, and the cumulative effect of two extra dividends each year adds meaningful income.

P.S. — There’s an interesting way to make money that’s getting a lot of attention lately. In short, a Texas man has figured out how to collect an extra $3,000 to $6,600 each and every month by simply owning shares of some of the safest stocks on the planet. If this sounds like something you’re interested in, keep reading…