| Bring
in 50% More Dividends Each Year By Employing a "Dividend
Capture" Strategy |
Published: February 22, 2006
A few weeks ago, a subscriber
wrote me to inquire about why shares of the Chile Fund (CH) were acting
so strange. Specifically, he wanted to know why the fund climbed from
$17.73 on Monday, December 12th to $18.81 on Friday, December 16th, only
to plunge like a lead balloon to $16.70 a share on December 20th.
The company's website held the answer to his question -- a news release
for Friday, December 9th announced an upcoming dividend payment.
Management said they planned to make an enormous dividend payout of
$3.08 per share on January 6, 2006 to "holders of record as of
December 21, 2005."
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So, why did the fund start
running out of steam after December 19th? Before I answer that question,
I first need to tell you about four important dates every income
investor should know.
Declaration date -- This is the date when a firm announces an
upcoming dividend payment, usually by issuing a press release a few
weeks before the dividend will actually be paid. The Chile Fund's
declaration date was Friday, December 9th, but the market didn't have
time to react until Monday, December 12th.
Record date -- This is the date on which a company draws up the
list of shareholders who qualify as "holders of record" to
receive its upcoming dividend payment. In this example, the record date
for the Chile Fund's distribution was December 21st.
Payable date -- This is the day the dividend check goes in the
mail or is electronically transferred to your brokerage account. The
payable date for the Chile Fund's distribution was January 6th.
These first three dates are simple enough to understand. It's the
ex-dividend date that's a bit trickier than any of the others. It's also
more important.
Ex-dividend date -- By this date, it's already too late to become
a "holder of record" for receiving the dividend payment. The
ex-dividend date is usually two business days before the record date and
a stock is usually marked with an "x" in the newspapers on
that date. In this example, the ex-dividend date for the Chile Fund's
distribution was December 19th, and the market reacted the next day --
December 20th.
So here's the game: Investors flock to the stock when the
dividend is declared (declaration date). That drives up the price until
the ex-dividend date. Once a stock "goes ex-dividend," the
price falls to reflect the value of the dividend payment. After the ex
dividend date, buyers of the stock or fund will no longer receive the
security's upcoming dividend payment. A stock may or may not bounce back
a few days after it goes ex-dividend.
As you can see in our chart,
the Chile Fund's share price climbed after a dividend was announced and
then fell sharply once the fund went ex-dividend.
Income investors who buy stocks for their dividend payouts will always
keep a close watch on the ex-dividend date. Using what's called a "dividend
capture strategy," these investors scoop up the stock right
before it goes ex-dividend, capture the dividend, hold the stock for at
least 61 days -- the minimum time required for a dividend to be taxed at
the recently reduced 15% rate -- then move out of the stock and into
another security that is about to go ex-dividend.
By employing a dividend capture
strategy, investors can capture 50% more dividends in any given year
from the same investment dollars. Here's why...
Let's say an investor purchases
a stock that pays quarterly dividends (most companies pay on a quarterly
basis). In this case, the investor would receive four dividend
payments throughout the year.
However, if that same investor
were to use a dividend capture strategy, then he or she would not hold
the stock for a full year. Instead, the investor would purchase the
stock right before its ex-dividend date and would sell it 61 days later.
After the sale, he or she would then turn around and plow that money
back into another company that is about to pay a sizable dividend
payment.
If you assume a 61-day holding
period for each captured dividend, this investor would be able to pocket
six dividend payments during the year (365 days divided by 61 equals 6)
instead of the traditional four -- that's 50% more dividends from the
same investment dollars. Even better yet, by focusing his or her dollars
exclusively on those companies that offer the very highest dividend
payments in any given period, the investor using the "dividend
capture" strategy could come out even further ahead.
Thanks to the growing
popularity of this dividend capture strategy, I've decided to make it a
regular feature of my premium income-oriented newsletter -- High-Yield
Investing. In an effort to help my readers time their future income
investment decisions, in all future issues of High-Yield Investing
I'm going to include a list of stocks with large dividends that will be
going ex-dividend in the coming month.
This feature should prove to be
extremely valuable for those readers looking to take advantage of a
"dividend capture" strategy. However, in order to receive this
list each and every month, you'll need to register for a paid
subscription to High-Yield Investing. To learn more about this
premium service for self-directed income investors, please visit the
following link:
https://web.streetauthority.com/subscribe-hy.asp
Good investing!
Carla Pasternak
Editor
High-Yield Investing
http://www.StreetAuthority.com
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Investing. |
Carla
Pasternak draws on a variety of financial backgrounds to make profitable
calls on income-generating stocks for her readers.
Carla has
been employed in the investment industry for more than two decades. In
addition to her work as a writer for several other nationally recognized
financial publishers, her previous experience includes a position as
President of a well-respected investor relations firm. She has also been
writing shareholder reports for public companies (annual reports,
speeches, corporate profiles, slide shows, etc.) since 1980.
A highly
successful investment analyst, Carla specializes in high-yield,
income-paying stocks. In that pursuit, she's always mindful to select
companies that not only pay rich dividends, but that also have the
potential to deliver strong long-term capital gains.
On the
educational front, Carla holds both MBA and Ph.D. degrees. When she's
not watching the market, she's teaching business courses at the college
level and managing several million dollars in portfolio assets.
