What is Dividend Capture?

Dividend capture is a strategy similar to dividend arbitrage that seeks to reap incremental gains somewhat reliably around the ex-dividend date of a stock.

The investor seeks to benefit from the fact that stock prices don’t always go down as much as they should on the ex-dividend date, so by selling quickly at that point, the investor may still get a small gain from the dividend that will still be paid to him or her. Dividend capture is a strategy that plays on slight inefficiencies in prices around the ex-dividend date.

Theoretically, according to the efficient market hypothesis especially, the price of a stock on the ex-dividend date, which is the point at which a new buyer can no longer be paid the forthcoming dividend, will be lessened by the amount of the dividend. The dividend is to be paid out soon after that to whoever owned the shares at closing the day before the ex-dividend date.

What often happens, however, perhaps because psychologically investors want to believe that the stock is worth more than the current price minus the dividend, or other reasons, the price doesn’t decrease by the dividend amount immediately.

Which means that a trader who dumps the shares first thing in the morning on the ex-dividend date has a chance to come out ahead when the dividend, which is worth more than the price had decreased at that point, comes in a few days later.

The catch is that the trader will owe short-term capital gains taxes, decreasing any possible profit by their regular income tax rate.