How to make a 100% return using dividend capture strategy - From Peanuts to Retirement (2024)

I am a big fan of dividends, that shouldn’t be much of a secret since I put out a “semi” regular report on my monthly dividends. I also have my dividend portfolio available here for anyone interested.

The dividend stocks I have were purchased over a span of a few years. I have them, I own them. I don’t spend a lot of time checking when to sell or what the price it’s at or what to do with them. No, nothing, nada. I know they are going to pay dividends at some point and I just wait.

So if I really think about it, I am holding these stocks and waiting for the ex-dividend date to show up so I can get the dividends. Knowing this, my thought was is there a way I can supercharge this? This is where a dividend capture strategy comes into play. This goes under a few other names – dividend harvesting, dividend scalping and dividend stripping.

What is a Dividend capture strategy?

A Dividend capture strategy is technically a trading strategy that involves buying a stock just before its ex-dividend date and then selling it shortly after the ex dividend date thereby guaranteeing the dividend payment. The goal of this strategy is to profit from the dividend itself or capture the dividend payout and not from the appreciation of the stock’s value.

I had read about dividend capture strategy before but I wasn’t sure what kind of returns I could expect. I had to figure out how to go about doing this dividend capture and also find a way to address some of the concerns I had.

Step by step Dividend Capture strategy process

A quick overview of the steps required to follow through on a dividend capture strategy are

1. Identify Stock

The first step is to identify stocks that pay dividends. The goal is to find stocks that have a history of having stable dividends and stock movement.

2. Purchase before ex-dividend date

The ex-dividend date is the date before which you need to own the stock for you to be eligible to get the dividends. It doesn’t matter how early before the ex- dividend date you buy the stock.

3. Hold through ex-dividend date

On the ex- dividend date, you will be listed as a shareholder of the company making you eligible for the dividends. On the ex- dividend date, typically the stock value will go down approximately the by the dividend amount.

4. Receive dividend

A lot of the hard work has been completed already. Now just wait for the dividends to hit your account.

5. Sell stock

The next step is to sell the stock. This step can be done before receiving the dividend. Once you are past the ex-dividend date, you can sell at any time and still get the dividend. Since the stock price comes down on the ex-dividend date, you probably have to wait a little bit for the stock price to come back to reach the price you bought it at.

6. Repeat

To fully engage in a dividend capture, step – 5 has to be repeated over and over. The quicker the turnover in stocks bought and sold, the more dividends you will receive.

Going through these steps gives the impression that it is very easy to employ a dividend capture strategy but it does not come without concerns.

Dividend capture strategy concerns and risks

1. Transaction costs

Buying and selling stocks frequently will cost more in transaction costs. This could very well eat into the profits gained from the dividends. With the number of brokers that offer no commission trades, this is less of an issue from a cost impact. That would depend on your broker. Even with commission free trades, another thing to look at is the exchange fees. Not all brokers have it but the ones that do will advertise the free commission trades and have a fine print for the fees. This is not going to cost as much as commissions like in the past but a few pennies for each trade.

2. Taxes

Dividend income is taxed depending on the type of account you are using for this strategy. Qualified and nonqualified dividends have different tax rates as well. A qualified dividend is eligible for a lower tax rate and an ordinary or nonqualified is higher, typically the same tax rate as the buyers regular income tax rate.

3. Market Risk and Timing Risk

I am putting the Market and timing risk together. They are very much related. The goal is to buy the stock and then sell the stock at a price no lower than the dividend. There is no guarantee of when the stock will be at that price and there is no way to know when there is going to be a market downturn.

My dividend capture strategy experiment

With the goal of trying to supercharge my dividends, I thought running an experiment with real money at stake would help me understand the whole process and also find out if there is money to be made. I will walk you through how I went about it and how I accounted for my concerns. This was done in May 2023.

A few things I had to straighten out before even buying a stock were these questions. We can call this the planning stage of the experiment.

1. How much money should am I going to allocate for this experiment?
2. What account am I going to use?
3. What about taxes?
4. What about transaction costs?

Planning

Transaction cost

Transaction cost part was easy. My account doesn’t have commissions for trades. I ignored the exchange fees for the purpose of the experiment.

Account and taxes

I was concerned about the taxes. The best plan I could come up with is trying to run this experiment in a Roth IRA so I can eliminate the tax concern completely.

Money

This was a bit more difficult. I had some uninvested money in the account but how much of it did I really want to put at risk for an experiment? I came to the conclusion of putting $1000 at risk altogether and then that would be broken down into two batches of $500 each.

My thought process for the $500 in each batch was that would be sufficient to buy at least one share of a stock and in some cases maybe 2 or 3 shares.

I wanted to have two batches so I could turnover stocks faster and for whatever reason if one of the stocks price didn’t recover, the experiment wouldn’t come to a halt.

When to sell

Another thing I stuck to was I would only sell the stock at or above the price bought the stock for. So let’s say I bought Apple stock at $180 per share for the dividend, then I would only sell it at $180 per share or above that. I didn’t want the dip in share price to eat into the dividend “profits”. This plays into my point above about having two batches.

Execution

Now that the planning is done, let’s move what the day to day looks like. This is the finding stocks and buying stocks part. This whole section is an example of a dividend capture strategy.

The first thing to do was identify the stocks that were about to have their ex-dividend dates right away. Like tomorrow. The idea being I will buy the stock today, ex-dividend date would be tomorrow and sell the first chance I get when it comes back up to my buy price.

I found a dividend calendar on marketchameleon that gave me the list of all stocks and ETFs that were about to hit their ex-dividend date.

I started this experiment on May 1st. But didn’t like anything I saw for May 2nd so I moved it to the next day. Here is a snip of May 3rd. Here is the link to that page as well

The page is already filtered by market cap of companies. I thought about going for the highest yield but got scared on what if those stocks take a lot longer to bounce back up. So I stuck to the higher market cap and looked out for companies I have heard of.

From the dividend calendar list for most days, I found a few stocks that I know. Basically thinking along the lines of – these are some reputable companies that are relatively stable, so I can pick one from them.

With that in mind, my next thought was is there a way I can filter this down to find the stocks that have the best chance of recovering it’s price after the ex-dividend date dip?

I was able to find the historical data for this on dividend.com. This website provides the average number of days for price recovery. Since my plan was to churn out as many as possible – the lower the average number of days the better.

I will go through what I did on May 2nd to make things a bit easier. I went on Marketchameleon and found a few companies that were about to hit their ex-dividend date on May 3rd.

I selected BUD, STZ and KBH from the list since these were companies I know. After that, I am running each name through dividend.com.

BUD price took 20 days to recover so that was a no go.

STZ took 5.3 days. I still didn’t like it but definitely significantly better than BUD.

KBH only took 1 day for the price recovery. Way better than BUD and STZ. This is historical data so no way of really knowing whether I would see a price recovery in a day but that’s what I ended up buying.

The first batch of $500 was used to buy KBH shares and I bought 11 shares at an average price of around $43.256 per share for a total of $475.82. My broker doesn’t allow fractional shares so I didn’t use the whole $500.

As luck would have it KBH price did recover the next day and I sold out of the position for $44.442 per share for a total of $488.85.

I got $1.65 in dividends on May 18th. The part where the stock was sold much earlier than the dividend payment date is not important. Only part that matters is owning the shares before the ex-dividend date as you can see.

On May 3rd, I used the remaining $500 on the next stock and on May 4th I used the money from selling KBH to buy the new dividend stock to continue the dividend capture.

Transactions

Instead of going through what I did each day, I think a table with the transactions would make it easier to understand. The process is pretty much the same for each day. The columns are pretty straight forward.

There is no sell date and sell amount for LHX because I didn’t sell it. I still have those 2 shares in my account. LHX definitely came above my buy price but I forgot about it, so I am not sure whether I should say I completed 14 or 13 trades for this experiment. Most of the stocks price recovered in a day so I was able to use it for another trade right away. The worst was NATI and TTEK when it took 11 and 10 days for price recovery.

Performance

A total of $28.29 in dividends from these 14 companies. This would be a yield of 2.8% on the $1000 in one month. That’s just from the dividends. $28.29 in dividends may not be much but this is on $1000 so if you have a bigger account, you can scale it accordingly. The 2.8% dividend yield is the main takeaway.

Since I waited for the stock price to recover, there are some gains from that as well. Excluding LHX, since there is no sell price – The total spend on all purchases is $5936.19, this is the same $1000 spend over and over. Total money back from selling is $5985.82. That is a difference of $49.63. This could be considered as a return of 4.9% in a month or can be looked at as another dividend.

Now imagine doing this for a whole year, annualizing these numbers is what makes this strategy really stand out. Annualized dividend comes out to 33.6% and annualized stock price return was 58.8% and the total return annualized would be 92.4%. You can almost double your money in a year.

Conclusion

Doubling your money in a year is not an easy task. My guess is it will be difficult for me to replicate the same performance over a span of a year. Difficult, not impossible. This would require every stock you buy to rebound quickly and that is easier said than done. This is also an active strategy that would require a time commitment every day. For anyone wanting to try this, I would only put a tiny portion of my account into this strategy.