|
In each issue of
High-Yield Investing, I include a
"Dividend Capture Dates" section.
The dividend capture strategy is simple: You buy a
dividend-paying stock right before it's about to go
ex-dividend and hold it for at least 61 days so the income
qualifies for the lowest possible dividend tax rate. Then,
you sell it and use the money to buy another stock that's
about to go ex-dividend.
With the right timing, investors can grab huge special
payouts when a company puts in a strong performance or is
restructuring. Last month I told
High-Yield Investing
readers about the $1.40 per share payment from American
Capital (Nasdaq: AGNC), which totaled about 5% of its share
price. I also flagged the $1.35 payment from National
Beverage (Nasdaq: FIZZ). That amount totaled 10.3% of the
share price.
There's one problem, though. Once the stock goes
ex-dividend, the share price typically drops by the amount
of the dividend. This makes sense -- the day a dividend
payment passes, the stock is worth less to new investors.
In a bull market, by the time you hold 61 days the shares
are likely to recoup the losses. But in a flat or bear
market, some stocks fall even more after offering large
payouts, and there are no guarantees they will recover. When
that happens, you could end up losing more from the lower
share price than you made in the dividend.
While there is no surefire way to mitigate the entire risk
of the dividend capture strategy, investors can make up for
some of the downward pressure of the approach by rotating in
and out of stocks.
Here's what to do: Pair two stocks that pay quarterly
dividends at different intervals and hold onto each for the
minimum required 61 days to get the reduced dividend tax
rate. By doing so, you'll squeeze out two extra payments a
year with the same investment capital. This extra income
could make up for any stocks that don't rebound after their
dividend payment.
Let's say "Stock A" and "Stock B" each sell for $100 per
share and pay a 12% dividend yield (meaning each delivers a
total annual payment of $12 a share). That equates to a
dividend payment of $3 a share each quarter.
By rotating in and out of the two stocks, you can capture
six tax-advantaged quarterly dividends each year, for a
total of $18 with the same investment dollars instead of
$12. In other words, you can boost your annual yield from
12% to 18% by rotating in and out of these two stocks.
Here's a more specific example of how it might work. Say you
buy "Stock A" before it goes ex-dividend at the end of
December and sell it at the end of February. You pocket $3 a
share from "Stock A." You then use the money you get from
selling "Stock A" to buy "Stock B" before it goes
ex-dividend at the beginning of March and sell it at the end
of April. You pocket $3 per share from "Stock B."
|
Purchase Date |
Sell Date |
Dividend |
|
Dec. 31 |
Feb. 28 |
|
|
Buy A |
Sell A |
$3 |
|
Mar. 1 |
Apr. 30 |
|
|
Buy B |
Sell B |
$3 |
|
May 1 |
Jun. 30 |
|
|
Buy A |
Sell A |
$3 |
|
Jul. 1 |
Aug. 31 |
|
|
Buy B |
Sell B |
$3 |
|
Sep. 1 |
Oct. 31 |
|
|
Buy A |
Sell A |
$3 |
|
Nov. 1 |
Dec. 31 |
|
|
Buy B |
Sell B |
$3 |
|
|
Total |
$18 |
You rotate in and out of these two stocks six times, buying
one just before it goes ex-dividend, holding it for the
minimum required 61 days, selling it after you've pocketed
the dividend, and using the funds to buy back the other one,
as shown in the table.
Remember: While this strategy can boost already impressive
yields, it's not risk-free. There's no guarantee that the
extra income will cover any falls in the share price.
That said, using a dividend capture strategy is one of the
most simple ways you can boost your income stream throughout
the year. It's no wonder "Dividend Capture Dates" is one of the most popular
sections in
High-Yield Investing!
Good Investing!
Carla Pasternak's Dividend Opportunities
P.S. -- In just two short weeks I'll be publishing my
March issue of
High-Yield Investing, which will have my latest
dividend capture opportunities. To make sure you don't miss
any of the chances to capture as much as 10% yields
in single payments, I invite you to try a
no-risk subscription.
|
Printer-Friendly
