Stocks for Dividend Capture

Dividend harvesting is a strategy in which an investor buys shares in a dividend stock on or before its ex-dividend date and sells the stock shortly thereafter. This strategy is an income capture strategy that allows investors to capture a company’s dividend with the expectation that the company’s share price will fall shortly after the ex-dividend date.

In this article, we’ll go into detail about the dividend harvesting strategy and review some of the important concepts related to investing in dividend stocks.

Terms Every Dividend Investor Should Understand

Before investing in dividend stocks there are four important dates for dividend investors to understand.

• Declaration date: This is the date the company’s Board of Directors announces that they will pay a dividend. On this day, the Board of Directors will also announce the date of record and the payment date. If the company raises their dividend it will frequently result in the stock price going up as investors anticipate that more investors will want to collect the dividend.
• Ex-dividend date: This is the day that an investor must own the stock in order to be eligible to receive a dividend payment. For a shareholder to collect the dividend they must own the stock before the ex-dividend date. So if the ex-dividend date is on a Monday, investors need to buy the stock no later than the previous Friday.

Keep in mind that although most trades are now able to be closed within seconds, it’s still best to make sure you buy shares even earlier to make sure you are can claim the dividend. Many trading platforms will let you know that you are eligible for the dividend. Robinhood, for example, lists any pending dividends under an Upcoming Activity section for individual stocks.

• Date of record: This is simply the day a company reviews its records in order to identify its shareholders. Sometimes this is the same day as the ex-dividend date, but frequently it is a day or two later. Learn more about ex dividend date vs record date.
• Payment date: This is the day a shareholder receives the dividend payment electronically or when the dividend payment is sent if the shareholder is receiving a paper check. Learn more: What are dividend payment dates?

How a Dividend Harvesting Strategy Works

Let’s say ABC Company is trading at $65 a share and announces a regular quarterly dividend of 50 cents. In a perfect market, the stock of the company would trade at exactly $65.50 until the ex-dividend date and then drop back to $65.00. That’s because on the ex-dividend date, the stock price falls to reflect the per share price being paid to shareholders.

This reflects the efficient market hypothesis (EMH) that is based on the idea that share prices reflect all information. This means that stocks will always trade at their fair value making strategies like dividend harvesting impossible in theory.

But markets rarely work that efficiently which is why the dividend harvesting (or dividend capture strategy) works.  So for this example let’s say on the ex-dividend date the stock only drops 25 cents and now trades at $65.25. This would be an ideal time for an investor to sell the stock with an attempt to execute the dividend harvest strategy. The investor could sell at this point and capture a net profit of 25 cents per share.

Learn more about choosing a winning dividend investing strategy.

Benefits of Dividend Harvesting

First, it’s simple to execute. Investors or traders don’t need any complex charting or fundamental analysis. They simply buy shares before the ex-dividend date and sell the shares at any point after the ex-dividend date. If the share price falls after the dividend announcement, the investor can wait for the price to go back up or simply choose a different stock.

That brings us to the second benefit. Committed dividend harvesters have plenty of stocks to choose from. There is a stock that is going ex-dividend on almost every trading day. And many sites provide an ex-dividend calculator so investors can track the stocks that they believe are the best candidates for this strategy.

Also, as our example shows, an investor can sell the stock before the payout date and still collect the dividend. They only need to be a shareholder of record on the ex-dividend date.

Limitations of Dividend Harvesting

The first drawback is that the stock could actually drop to the exact amount of the dividend (or lower) on the ex-dividend date. In this case, the shareholder will have to decide whether to take a loss or simply hold the stock and wait for an advantageous opportunity to sell the stock for a profit. A similar concern is if the stock price falls significantly before the ex-dividend date. This can occur for any number of reasons.

Additionally, unless a trader is using this strategy in a tax-advantaged account (e.g. IRA), any dividends will be taxed at the investor’s ordinary income tax rate. This can be avoided if the investor holds the stock for at least 60 days during the 121-day period that begins 60 days before the ex-dividend date.

The Bottom Line on Dividend Harvesting

Dividend harvesting is a simple strategy that can be used by any investor but is primarily used by day traders as part of an income-capture strategy. It relies on the fact that markets rarely follow the efficient market hypothesis.

However, although the strategy is simple, it is not foolproof because the trade can easily go against the investor for any number of reasons. And the possible losses can easily dwarf any potential gains.

Learn more: 5 Best Dividend Capture Stocks