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Buying Before the Ex-Dividend Date, and Selling After

Cityscape at sunset with the text 'buying before the ex-dividend date and selling after' super-imposed over it.

The ex-dividend date is an important date to keep in mind when purchasing a stock, but there are some who like to buy a stock before the ex-dividend date, and sell the stock after to “scoop the dividend.”  Doing this is possible but it’s a controversial topic and you need so much capital to make it worth it that many people choose not to. This strategy is also referred to as dividend capture.

Can a Profit be Made Using the Dividend Capture Strategy?

I’m sure a profit can be made, but it will take a lot of effort and I don’t advise this mainly because I have a buy and hold philosophy; but there are other reasons why this is probably not a good idea either:

  • After a stock issues a dividend, the price of the stock theoretically should go down. This is because when dividends are paid out, retained earnings is reduced. For more information on this subject read here.
  • You have to risk a large sum of money to make the dividend gains enough to cover any price volatility and trade commissions.
  • When you capture the dividend you then have potential tax liability such as short-term capital gains. Additionally, if you don’t hold the dividends long enough, then they won’t be considered “qualified dividends” and you’ll face taxation on the dividends as well.
  • You run the risk of buying the stock high (security prices go up right before an ex-dividend date) and selling low (the price tends to go down after a dividend is issued). This is a basic accounting truth, but I provide an explanation here.

Why not buy stock before the ex-dividend date?

With those things in mind, there are quite a few things this dividend will have to cover: brokerage commissions, capital gains taxes, the loss on the price drop, and the time you’ve used chasing the dividend.  After those are accounted for, you must hope there is enough money left to make the effort worth it!

It sounds like a lot of work to me, which is why I don’t do it.  Can profit be made here?  Profit can probably be made, but not enough to attract me. Now, if you’re a much bigger investor than me and have a large amount of money to use for this strategy, then scale is key.

Why Does Dividend Capture Require Lots of Capital?

When you use a strategy like dividend capture, you need a good amount of capital to scale it properly (or you can buy on margin, but I don’t encourage that). Why? Because you have to offset your costs.

Dividend Capture Example:

Let’s say that your brokerage lets you trade for $5 a trade. If you buy stock that costs $50 and pays out a quarterly dividend of $0.25, then just to offset the costs, you need to purchase $1,000 worth of stock. Don’t forget, you plan to sell the stock too, so that’s another $5, which means you actually need to buy $2,000 worth of the stock to offset just your trading costs.

Now, let’s say you wanted to add a $100 profit on top of it:

$100 profit + $10 trade fees = ($110/.25 dividend) * $50 per share = $22,000.

Uh oh, the stock price dropped while you were holding it, you’re $44 shy of your goal, how much would you have had to purchase to offset this loss?

$100 profit + $44 to cover potential loss + $10 trade fees = ($154/.25 dividend) * $50 per share = $30,800.

That is an extra $8,800 worth of this stock to cover about a $0.07 decline in the stock price and get your $100 profit. Do you have $22,000 dollars laying around to make a $100 profit? Keep in mind that I didn’t even touch on the subject of the various taxes you might have to pay on the dividends or the gains of the stock, assuming you have capital gains.

The Internet Said Dividend Capture was Good!

You may see a lot of talk online about buying before the ex-dividend date and selling after, and you may see people making a lot of wild claims, but most of those are just wild claims.

People are always searching for the quick buck, but resorting to dividend investing reminiscent of day trading is a quick way to be working extra hard for peanuts.  Stick to regular investing, and wait it out, because any other way is just a classic retelling of “the Tortoise and the Hare.”

Buy dividend stocks for the consistent dividend, and day-trade the stocks worth day-trading.

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