Contributor Since 2014
When I was 8 years old my father introduced me to the world of stocks. He explained to me that buying a share was really an opportunity to become a part owner in a company. I couldn't believe it! To think that I could own part of Disney (DIS), or Hershey (HSY), or an airline, or a movie theater, or a supermarket or a bookstore... It was tough to believe. When he told me that the companies would even pay me money a few times a year to own them... Well, he sold me on the idea. He asked me if I could own any kind of company what would I want to own, and I honestly don't know what my thinking process was, but I said a diamond mine.
We looked through the back section of that day's Wall Street Journal. I had no idea what all of the symbols and numbers meant. It was overwhelming. He patiently explained what stock tickers were, and the prices and the opens and the closes, and the dividends. He told me to pay attention to the dividends, because that's what they would pay me. He skimmed through it and found De Beer's diamond mine (now a subsidiary of Anglo American, AAUKFL). I remember it was selling for 8 1/2 dollars. He called my uncle Don, a stock broker in New York. He said, "Don, my son wants to purchase a hundred shares of DeBeers at $8 1/2." They spoke for a few minutes, and I probably went jumping around the house excitedly that I now owned a diamond mine. The next day and everyday thereafter for weeks, maybe months, I would get home from school and wait for my father to get home. We'd go through the paper together to look for the stock symbol. I would be elated when it would go up a 1/4 point and depressed when it would drop by an 1/8. I remember when it went to 12 a share, my father called uncle Don and told him to sell it. Don, as it turns out, never bought it. I think he told my father that he forgot about it, or thought my father wasn't serious and was just trying to teach me about it... Needless to say, uncle Don became one of my less favorite people for a while...
Since that time, like many people I have had a number of adventures and misadventures in the stock market. I have tried a number of stock strategies and have adapted largely a value portfolio with dividend growth stocks. I have had a few growth stocks as well. For the most part, I have done very well. Not spectacularly, but pretty respectable returns with this mix of stocks and funds. I have realized that sometimes long term success can be made with many short term profits. That instead of swinging for the fences, maybe I can make a nice profit from hitting singles. To this end, I have decided to try something that I have wondered about for some time, but never pursued: a dividend capture strategy.
I am sure that you are all aware of what dividend capture is, but let me summarize it briefly. The idea is to own a stock before the ex-dividend date and to sell it after the date, thereby capturing the dividend, and redeploying the capital elsewhere to hopefully capture another dividend. In theory this is very clever and makes a lot of sense. Instead of earning 3% from Coca Cola (KO) or 6% from AT&T (T), I could earn both with the same capital. However, this strategy has received a lot of criticism, which I am not sure is fully warranted.
The most common argument is that it is not profitable. Apparently a study that looked at this a number of years ago came to the conclusion that once people took into account broker fees and taxes, it was a less than stellar approach. However, as far as I can tell, this strategy was done before the era of online discount brokerages, thus minimizing the fees, doing this in a retirement account should eliminate the short term capital gains taxes.
The other argument is that this ignores long term capital gains. I cannot argue with that, except that it also allows you to ignore long term capital losses. Like many of you, I have owned stocks whose share price has shot up, and I sat on a large potential capital gain, only to see the price quickly plummet and I would sit on a loss. Kicking myself for having been greedy and not taken the profit when it presented itself. I have also held onto stocks like Exxon Mobil (XOM) for years -- to watch my share count increase with dividend reinvestments but the overall value to decline.
To that end, I have decided to allocate a certain amount of money from my IRA portfolio to embark on this. I have gone about the strategy the following way.
#1 -- Looked at a calender of stocks going ex-dividend over the next month.
#2 -- Aimed for stocks that yielded between 1.5-3% per year annually.
#3 -- Having narrowed my focus, calculated how long on average over the last 2-3 years it took the share price to recover having paid the dividend. Obviously shorter was better.
Having narrowed the field, my first purchase was on Friday, November 23, 2018. I purchased 200 shares of Johnson and Johnson (JNJ) at 142.34. . On Monday, November 26, the stock went ex-dividend at $0.90 per share, earning for me $180 to be paid in a few weeks time. The stock recovered more quickly than I had expected and indeed within a day's time I was sitting on a small gain. I decided to lock in the gain and sold the 200 shares at $144.84. This lead to a capital gain of $479.17, with an expected dividend of $180.
Emboldened by my first trade, I decided upon my second. I purchased 300 shares of the Dover corporation (DOV) at $84.27 on November 28. On the 29th, the stock went ex-dividend for $0.48 for a total of $144. As I wanted to be out of the position by week's end, I sold 3 covered call contracts at $84 per share for $157.99. This would ensure a small loss on the share price, but would cushion with the call premium. Indeed, the price of the stock went up to 84.90 a share, so I missed out on the appreciation, but still wound up positive for the trade (-81 on share price but +158 with the call) for a total of $77 + $144 for the dividend.
For the week, I am up $880.17 which is about 3%. That's pretty good. It is doubtful that I will sustain that kind of gain for the year (156%), but I would be quite happy with a fraction of that. Either way, this will be a fun adventure and I welcome those of you wish to come along for the ride.
I welcome comments and criticisms. I am new to this particular arena and would love whatever advice (preferably polite) that you have to offer.
Disclosure: I am/we are long JNJ, XOM.
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.