The dividend capture strategy is quite simple to understand, but harder to pull off.
The idea is that you buy the shares in your target company immediately before the ex-dividend date and then sell them either on the ex-dividend date or shortly afterwards.
By buying shares before the ex-dividend date, your name is on the register at the record date and you will receive the dividend. Then, by quickly selling the shares you alleviate the risk of holding them long term.
That sounds like a perfect strategy for an income investor. But, of course, it’s not quite that simple.
In theory, when a stock trades ex-dividend its price will drop by an amount equivalent to the dividend.
That makes sense. If you buy a £10 share the day before it goes ex-dividend then you are entitled to a dividend of, for example, 40p.
However, if you bought the same share the next day, it will have gone ex-dividend, and — in theory — its share price will have dropped by 40p to £9.60.
That would ensure that the price you paid was the same as if you had bought it the previous day and received the dividend.
However, in practice, this exact movement in the share price seldom occurs and that is why this strategy can work.
Proponents of dividend capture anticipate that the stock will not fall as far as expected. Or, that it will often bounce back to its prior level within a few days.
So, for example, if the shares open at £9.80 on the ex-dividend date, you could immediately sell them and take a 20p loss. But, that loss is less than the 40p you have made on the dividend you captured and so you are up 20p overall. Job done.
By repeatedly targeting shares that are about to go ex-dividend you can collect a continuous stream of dividends without ever holding onto the shares for more than a few days.
It’s a nice idea in theory but far harder to pull off in reality. As well as the costs involved there are no guarantees that the shares will play ball and their price could well move much lower than the dividend amount.
So, on balance, if you find a good dividend yielding stock trading at a good price then its probably better to simply buy it for the long run, or of course, use it as the basis for the FIRE Revolution strategy.