If a stock will soon pay a nice dividend, it is tempting for an investor to buy shares and hold them long enough to earn the dividend, then sell the shares. To earn a dividend an investor must only own the shares for one day. However, the share price change on the ex-dividend date prevents this strategy from generating a profit.
Record and Ex-Dividend Dates
To receive a dividend payment from a stock an investor must officially own the shares on a specific date, called the record date. The company paying the dividend will announce the record date in the dividend declaration. A stock market purchase or sale of shares requires three business days to become official or "settle." To be a shareholder of record for a dividend payment, the shares must be purchased at least three business days before the dividend record date. Two business days before the record date the shares go ex-dividend.
Share Value Ex-Dividend
On the ex-dividend date, the share price will start trading at the previous day closing price minus the amount of the dividend. For an investor who owns the shares, the value remains the same. Consider a stock at $40 the day before going ex a $1.50 dividend. On the ex-dividend open, the shares will be at $38.50 and share owner will soon receive the $1.50 dividend for a total value of $40. The investor's total investment has remained the same.
Share price reporting on the ex-dividend date may surprise investors. When the stock opens at the previous closing price minus the dividend amount, the share price change will show unchanged. For this example, the shares closed the previous day at $40 and opened on the ex-dividend date at $38.50 unchanged. If the shares moved to $38.60, the price reporting would show a 10 cent gain from the previous day.
Dividend Capture Strategy
The trading strategy of dividend capture attempts to buy shares just before the ex-dividend date and hold the shares for a few days to earn the dividend. The strategy must allow the share price to recover from the dividend equal price drop on the ex-dividend date to be profitable. The strategy will have limited success if the share price does not quickly rebound from the ex-dividend price drop.
Tim Plaehn has been writing financial, investment and trading articles and blogs since 2007. His work has appeared online at Seeking Alpha, Marketwatch.com and various other websites. Plaehn has a bachelor's degree in mathematics from the U.S. Air Force Academy.