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Quarterly dividend payments are a nice treat to reward blue chip stock investors for their patience and loyalty. In the long-term, dividend yields of 3 percent or higher can make a meaningful impact on portfolio returns as well, especially while interest rates remain historically low. Dividend capture traders attempt to enter and exit dividend paying stocks as quickly as possible and still receive the dividend.
If the general idea sounds too good to be true, there are definitely caveats to the strategy. Therefore, as soon as a company has committed to paying out the dividend, its share price theoretically adjusts downward to reflect the lost dividend value. The ex-dividend date is the date on which an investor must be a shareholder of record to receive the next dividend payment.
However, dividend capture traders can take advantage of two phenomena that occur on the ex-dividend date. First, the market adjustment often does not reflect the full value of the dividend payment. For example, a stock that pays a 4 percent annual dividend yield should theoretically open down 1 percent on each of its four ex-dividend dates throughout the year.
If the stock instead initially opens down 0. The other scenario is that the dividend stock initially opens down 1 percent, but quickly rebounds, providing another potential window of opportunity for traders to sell.
These high-yield dividend stocks are often well-established blue chip companies. These companies routinely experience a flood of buying volume on any pullback, including those that happen on ex-dividend dates. When dip buyers swoop in, dividend capture traders take advantage of the rebound by cashing out.
The primary downside of using a dividend capture trading strategy is the extremely thin profit margins the trades generate. In the example above, the hypothetical trade would result in a gain of 0. In other words, trades may need to place extremely large orders to make narrow-margin dividend capture trades worthwhile. This article is provided for educational purposes only and is not considered to be a recommendation or endorsement of any trading strategy.
The author is not affiliated with Lightspeed Trading and the content and perspective is solely attributed to the author. Navigating Taxes as an Active Trader.
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