Stocks pay dividends to their owners on the ex-dividend date. Dividend Capture Strategies capture the value of the dividend by owning the stock at or near the ex-dividend date. These strategies can require a lot of trading, but the returns are relatively quick, and can really add up over the course of a year.

Pick A Stock

The hard part of the strategy is finding a stock that is going to be going ex-dividend soon. One place to find this data is at www.Dividendium.com. The site maintains a list of stocks going ex-dividend from soonest to latest, so you will want to go forward about a week or two to find a stock that hasn't run up in price already in anticipation of the dividend payout.

Then you can research that stock at www.BigCharts.com. The "detailed quote" page will show the exact ex-dividend amount that you want to capture.

Finally, you want to make sure that you can get into and out of the stock quickly. This means you want liquidity in the stock. So pick a stock that has an average daily volume of more than 100,000. The Dividendium list displays a link to the Yahoo! page where this data can be found for each stock.

Buy The Stock

The intention is to buy low and sell high. Because you are buying so close to the ex-dividend date, you want to use a limit order. If you try to buy at market, you may get caught buying the stock with the dividend already priced in.

Another concern is the cost of trading. If you pay high commissions, you won't make a good return. So to keep trading costs down, find a good discount broker. One of the best and cheapest is www.ChoiceTrade.com. They execute stock trades for only $5, and don’t charge extra for stop or limit orders.

Wait For The Gain And Sell

Now keep a close eye on the stock price. The goal is to have it go up by the amount of the dividend, and then sell. A good way to automate this is to put in a limit order to sell the stock at your purchase price plus the dividend amount as soon as your buy order is filled.

If the stock price goes down during that week, it may be necessary to cut your losses and get out. But in general it will rise in price as others try to get in before the ex-dividend date to grab the dividend.

Generally a stock will drop in price at least the amount of the dividend after the ex-dividend date. For this reason, you want to make sure to sell the stock before the ex-dividend date to lock in the gains. So although you do not actually collect the dividend, you collect the appreciation equal to the dividend.

Count The Money

The gains on a dividend capture trade are generally small percentages, but the number of times you execute the strategy can really make it add up. Because the trades are so quick, taking from one to two weeks at a time, you can do a number of them over the year. At one trade a week, that's 52 trades a year.

Another cost to look out for is taxes. Because the stock is held for such a short time the taxes on gains are quite high. One way around this is to do your trades in an IRA account. IRA accounts don't pay taxes on their gains, so all of the profit is yours to keep.

Example Trade

On January 4, 2006, the drug company Bristol-Myers Squibb (BMY) paid a $0.28 dividend. If you had bought the stock at the open on December 29, 2005, a week earlier, the price was $22.90.

Over the course of the week, the price rose to a high of $23.27. Since you were only expecting to get the dividend, you would have sold at $23.18 ($22.90 + $0.28) either on the day of purchase, or later on January 3, 2006.

That’s a gain of 1.2% over 1 day to a week. So at 52 times a year that would be a return of more than 62%, not including commissions or taxes. To put that in perspective, a 62% annual return turns a $4000 IRA into a $1.3 million dollar account in 13 years.

Summary

Dividend Capture Strategies can pay big dividends if executed correctly. Picking the stock, buying and selling at the right time, and keeping costs like taxes and commissions under control are the keys to successful execution.