A Look At Dividend Capture In CEFs

Summary

• Strong capital gains seen in the CEF market are unlikely to be repeated in the near term suggesting that investors may need to turn to alpha-generation strategies to drive returns.
• One such strategy is dividend capture which involves holding a security for just long enough to capture the distribution.
• We find that the simple dividend capture strategies do not appear to generate excess returns though there is more positive evidence for certain variations of the strategy.
• We also find evidence that CEF investors are pursuing dividend capture strategies by looking at the behavior of discounts around the ex-dividend dates.
• Investors can take advantage of this technical pressure by behaving in a contrarian way and allocating to funds on or after their ex-dividend dates.
• Looking for more investing ideas like this one? Get them exclusively at Systematic Income. Get started today »

The strong capital gains over the last few months in the CEF market are unlikely to be repeated. This means that to generate alpha income investors will need to rely more on alpha generation strategies. One such popular strategy is dividend capture. There are two reasons why the CEF population may be potentially attractive for dividend capture strategies. First, the CEF market is relatively inefficient in large part owing to its small size which means it does not attract a lot of smart institutional money. And secondly, the CEF population looks like an attractive target because of the tendency to pay larger dividends and do so monthly.

A dividend capture strategy is an income-focused short-term trading strategy designed to hold securities only for long enough to capture their dividends. At its most basic the investor purchases the shares prior to the ex-dividend date and sell the shares on or after this date. There is no reason to hold the security till its record or pay date.

The key question for investors pursuing a dividend capture strategy is what the ex-dividend date of a given fund is. This date can vary month to month and is typically announced by the fund in a release or on its website prior to the fact. For example, this is what the PIMCO release looks like. Aggregator sites like CEFConnect also publish these dates.

Source: PR Newswire

When thinking about executing the dividend capture strategy there are a number of considerations. First is the technical buying and selling pressure from other investors who are pursuing the strategy. The selling pressure is likely to be the highest on the ex-dividend date and should subside in subsequent days. Stacked against this is the market risk element. The longer the investor holds the fund out of the ex-div

Analyst’s Disclosure:I am/we are long PCI. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.