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The dividend capture strategy is a unique approach to the
market, but it shares one thing in common with any
successful investing idea, it has immense profit
possibility. In each issue of
High-Yield Investing,
we include a "Dividend Capture Dates" section. The strategy is pretty simple: You buy a dividend-paying
stock right before it's about to go ex-dividend, hold it at
least 61 days so the income qualifies for the lowest
possible dividend tax rate, and then sell it and use the
money to buy another stock that's about to go ex-dividend.
With the right timing, you can grab
huge special payouts when a company puts in a strong
performance or is restructuring. There's one problem,
though. Once the stock goes ex-dividend, the share price
typically drops by at least the amount of the dividend. Some
stocks fall even more after offering large payouts, and
there are no guarantees they will recover. When that
happens, you could end up losing more from the lower share
price than you made in the dividend.
For example, The Korea Fund (NYSE: KF), a large
investor in public equity markets in Korea went ex-dividend
on December 29th of 2008 for $90.30. Following the critical
date of the ex-dividend, shareholders responded by plunging
the stock from $117.99 to $32.02. After that, the fund never
regained its lost ground.
As you can see,
I think it's vitally important to consider the risks of the
dividend capture -- risks of the share price falling below
your original investment capital, of the dividend being cut
or suspended even after it was declared. Or even the most
severe, risk of the company going bankrupt.
While there is no surefire way to mitigate the entire
risk of the dividend capture, you can alleviate some of the
downward pressure of the approach by rotating in and out of
stocks. You can pair two stocks that pay quarterly dividends
at different intervals and hold onto each for the minimum
required 61 days to get the reduced dividend tax rate. By
doing so, squeezing out two extra payments per
year with the same investment capital.
Let's say "Stock A" and "Stock B" each sell for $100 per
share and pay a 12% dividend yield (each delivers a total
annual payment of $12 per share). That equates to a dividend
payment of $3 per share each quarter. By rotating in and out
of the two stocks, you can capture six tax-advantaged
quarterly dividends each year, or $18 per share. In other
words, you can boost your yield from 12% to 18% by rotating
in and out of these two stocks.
Here's an example of how it might work. Say you buy "Stock
A" before it goes ex-dividend at the end of December and
sell it at the end of February. You pocket $3 per share from
"Stock A."
You then use the money you get from selling "Stock A" to buy
"Stock B" before it goes ex-dividend at the beginning of
March and sell it at the end of April. You pocket $3 per
share from "Stock B."
You rotate in and out of these two stocks six times, buying
one just before it goes ex-dividend, holding it for the
minimum required 61 days, selling it after you've pocketed
the dividend, and using the funds to buy back the other one,
as shown in the table below
|
Purchase Date |
Sell Date |
Dividend |
|
Dec. 31 |
Feb. 28 |
|
|
Buy A |
Sell
A |
$3 |
|
Mar. 1 |
Apr. 30 |
|
|
Buy B |
Sell
B |
$3 |
|
May 1 |
Jun. 30 |
|
|
Buy A |
Sell
A |
$3 |
|
Jul. 1 |
Aug. 31 |
|
|
Buy B |
Sell
B |
$3 |
|
Sep. 1 |
Oct. 31 |
|
|
Buy A |
Sell
A |
$3 |
|
Nov. 1 |
Dec. 31 |
|
|
Buy B |
Sell
B |
$3 |
| |
Total |
$18 |
While this strategy can boost already impressive yields,
it's not risk-free. Funds using this approach have been
badly beaten up in the market downturn. But, now that the
market seems to want to rally, this may be an opportune time
to consider a dividend capture strategy.
-- Carla Pasternak
Editor, GlobalDividends.com
P.S. Want to learn more about the dividend capture strategy?
Then, receive more information from Carla's High-Yield
Investing newsletter by
following this link.
P.P.S.
-- Don't miss a single issue! Add our address,
Research@GlobalDividend.com,
to your Address Book or Safe List. For instructions,
go
here.
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