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The Ins And Outs Of Dividend Capture Strategy

The Ins And Outs Of Dividend Capture Strategy - Chevron Corporation NYSE:CVX, United Technologies Corporation NYSE:UTX

Investors often think of dividend payments as a somewhat boring long-term advantage to owning certain stocks that have relatively strong cash flow. However, quarterly dividend payments can also provide short-term trading opportunities.

Dividend Capture Strategy

The dividend capture strategy is a trading strategy that involves trading a dividend-paying stock around its ex-dividend date. The ex-dividend date is the date on which an investor must be a shareholder of record in order to receive the upcoming dividend.

Traders who wish to receive the dividend must buy the stock by the end of the trading day prior to the ex-dividend date. They can then sell the stock at any point on the ex-dividend date and still receive the dividend.

Premarket Prep’s Dennis Dick recently discussed how dividend stocks tend to exhibit certain trading patterns in the days surrounding their ex-dividend dates.

“The stocks tend to be strong ahead of the ex-dividend date, they tend to open sometimes a little bit higher on the ex-dividend date than sometimes they should, and then usually they are weak afterward,” Dick explained.

These trends are driven by both long and short traders positioning themselves for the dividend.

“You get people that maybe are short and they don’t want to pay the dividend, and so they’ll cover. You also get dividend capture traders,” Dick said.

Together, these two types of traders boost share prices ahead of the ex-dividend date. Despite the fact that a stock’s share price is adjusted downward by the amount of the dividend on the ex-dividend date, buyers tend to step in and buy the stock at the cheaper price. That means many dividend capture traders are able to sell the stock on the ex-dividend date at a smaller loss than the profit they gain from the dividend.

Real-Life Application

The next opportunity to capitalize on the dividend capture trade comes in Tuesday’s session. Chevron Corporation CVX 0.16%, United Technologies Corporation UTX 0.19% and Walgreens Boots Alliance Inc WBA 0.53% are just three of the many stocks going ex-dividend on Wednesday.

For more trading ideas and insight on day trading, check out PreMarket Prep LIVE every morning from 8–9:30 a.m. ET here. You can also listen to complete episodes on Soundcloud, iTunes and Stitcher.

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