On September 10, Microsoft will pay its regular $0.31 per share
quarterly dividend. But did you know that you’d only have to hold
Microsoft shares for one day, August 17, to collect that payout.
That is, you could buy shares on August 17, sell them on August 18,
and still collect the dividend.
Here’s how it works. August 18 is the “ex-dividend date” for that
dividend. That means that buyers on August 18 are buying the shares
“excluding the dividend.” But anyone who bought before August 18,
and didn’t sell, does get the dividend. You could look up the
ex-dividend date for most U.S.-traded stocks on Yahoo Finance (finance.yahoo.com)
or almost any financial website.
That you only need own a stock for one day to collect the dividend
has inspired many investors to pursue a “dividend capture” strategy,
which involves holding a stock just long enough to collect the
dividend, selling at or above their purchase price, and then moving
Not That Easy
Of course, it’s not that easy. For starters, theoretically,
the share price drops by the dividend amount on the ex-dividend
date. But, in fact, many different factors influence a stock’s price
movements on any given day, and prices typically don’t drop by the
exact dividend amount on the ex-date.
Dividend capture players follow a variety of strategies to “capture”
the dividend. Some try to buy before the dividend is announced, some
sell on the ex-date, while others wait for a stock to recover to a
predetermined price before selling. Dividend capture is a
controversial topic and not everybody believes that any capture
strategy can be consistently profitable.
All that said, I’ve spent some time analyzing historical data and
devised some ideas, that based on limited testing, show promise.
Stick With Special Dividends
Instead of working with regular quarterly payouts, I’ve
focused my research on special dividend announcements. Special
dividends are one-time payouts that are often much larger than
regular dividends. For instance, regular quarterly dividends
typically amount to around 1% of the stock’s trading price (yield)
compared to 3% or 4%, and sometimes much higher, for special
payouts. Those higher yields mean that the dividend effect is less
likely to be washed out by daily trading price fluctuations.
Since November 2009, I’ve tracked what I’ve termed “investable”
special dividend announcements on my Dividend Detective (www.dividenddetective.com)
website. To qualify as for that list, I required either a minimum $2
per share payout, or at least $0.50 per share and a minimum 7% yield
(special dividend percent of share price). Using those limitations
only 33 dividends qualified as investible during 2014.
Dividend Capture: What Works
Using that list, after testing various strategies, I
determined that profitable trades require 1) buying either on the
announcement date or within two market days after the announcement,
and 2) selling on the day BEFORE the ex-dividend date.
Selling before the ex-date sounds counterintuitive because you’re
not collecting the dividend. However, share prices often rise
leading up to the ex-date. More often than not, you’ll make more
money selling before the ex-date, instead of
collecting the dividend and then selling at some
predetermined later date.
Looking at the 42 qualifying special dividends announced in 2014 and
the first six months of 2015, you would have averaged a 2.6% if
buying on the first day after the announcement and 2.5% if you
bought on the second day.
What Works Better?
Confining your universe to minimum $2/share payouts would
have cut your investible opportunities to 27 plays, but upped your
return to 3.4% and 2.9%.
What Works Best?
Further limiting your candidate list to minimum $3 dividends
would have cut your opportunities to 15 trades, but upped to average
returns to 4.7% and 4.2%.
What Doesn't Work?
Focusing on the highest or lowest yielding dividends did not
measurably help the returns.
You can see a list of each day’s declared dividends on Seeking Alpha
Given the limited testing that I’ve done, my numbers are far from
the last word.
Try doing your own testing using play money and let me know your
results or any improvements that you’ve devised.