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Published: February 8, 2010
In each issue of
High-Yield Investing, we
include a "Dividend Capture Dates" section.
The strategy is pretty simple: You buy a dividend-paying stock
right before it's about to go
ex-dividend and hold it for at
least 61 days so the income qualifies for the lowest possible
dividend tax rate. Then, sell it and use the money to buy
another stock that's about to go ex-dividend.
With the right timing, investors can grab huge special payouts
when a company puts in a strong performance or is restructuring.
There's one problem, though. Once the stock goes ex-dividend,
the share price typically drops by at least the amount of the
dividend. Some stocks fall even more after offering large
payouts, and there are no guarantees they will recover. When
that happens, you could end up losing more from the lower share
price than you made in the dividend.
While there is no surefire way to mitigate the entire risk of
the
dividend capture strategy, investors can alleviate some of
the downward pressure of the approach by rotating in and out of
stocks.
Here's what to do: Pair two stocks that pay
quarterly dividends at different intervals and hold onto each
for the minimum required 61 days to get the reduced dividend tax
rate. By doing so, you'll squeeze out two extra payments a year
with the same investment capital.
Let's say "Stock A" and "Stock B" each sell for $100 per share
and pay a 12% dividend yield (each delivers a total annual
payment of $12 a share). That equates to a dividend payment of
$3 a share each quarter. By rotating in and out of the two
stocks, you can capture six tax-advantaged quarterly dividends
each year, or $18 a share instead of $12. In other words, you
can boost your yield from 12% to 18% by rotating in and out of
these two stocks.
Here's an example of how it might work. Say you buy "Stock A"
before it goes ex-dividend at the end of December and sell it at
the end of February. You pocket $3 a share from "Stock A." You
then use the money you get from selling "Stock A" to buy "Stock
B" before it goes ex-dividend at the beginning of March and sell
it at the end of April. You pocket $3 per share from "Stock B."
You rotate in and out of these two stocks six times, buying one
just before it goes ex-dividend, holding it for the minimum
required 61 days, selling it after you've pocketed the dividend,
and using the funds to buy back the other one, as shown in the
table below:
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Remember: While this strategy can boost
already impressive yields, it's not risk-free. Funds using this
approach were beaten up badly in the market downturn. Pay close
attention to the overall market and the stock's underlying
fundamentals. With the market pulling back the past few days,
this may be an opportune time to lock in higher yields. With the
dividend capture strategy, your effective yield will be even
higher.
-- Carla Pasternak
Editor
High-Yield Investing
High-Yield International
Dividend Opportunities
P.S. Want to learn more about the dividend capture strategy?
Click here. |
