Dividend capture: how and why it works

Dividend investing is one of the oldest and smartest implements in the investors’ toolbox.

You buy stocks in big, steady, dividend-paying companies, and pocket the dividends, safe in the knowledge that the share prices should be moving upwards too.

Dividend capture is slightly different, because this method doesn’t sit on piles of stocks, waiting for them to pay out. Instead, it buys stocks just before they payout, then sells them shortly after.

Dividend pocketed – thank you very much.

Of course, if it was that simple, everyone would be doing it, right?

Here’s what could go wrong if you tried doing this without any guidance …

– you wouldn’t get a good enough price for the stock when you sold it

– you’d pay too much for the stock in the first place, as the dividend would be ‘priced in’

– even if you made a profit, you’d struggle to overcome the transaction costs of so much buying and selling shares

So, how does James Hudson make this work?

He has simple (but very important) criteria that a stock must match before he’ll even try this trick on it. And, by using spread betting, he avoids high transaction costs, and doesn’t require a large trading fund.

If you’ll indulge me, I’m going to get a bit anoraky about why this system works …

We make money from the markets when we buy something that’s underpriced, and sell it at a higher price. We rely on things being relatively under- or over-priced in order to do this.

I’ve talked in Trader’s Bulletin before about efficient markets.

The efficient market hypothesis goes something like this …

Financial markets are efficient …
… information (i.e. the fundamentals) flows freely …
… investors make rational decisions based on that information.

The reality is, however, that people make downright terrible, irrational decisions all the time. But, even so, some markets are naturally more efficient than others.

Forex markets, for example, are the largest, most liquid markets on the planet, and all that liquidity makes them very efficient.

And, this level of efficiency means it’s really tough to find price discrepancies.

A very illiquid market, however, like penny shares, will often have wild price discrepancies. But these markets have too little liquidity – you might struggle to off-load your shares at the price you want.

And that’s where big dividend-paying shares are perfect. They are liquid enough that you’ll never have problems buying and selling; but not so liquid that we can’t (if we know where to look) take advantage of price discrepancies.

Market efficiency is going to work against you if you’re trying to capture dividends. Prices of stocks tend to run up as they approach their ex-dividend date, and they tend to drop after the dividend is paid. However, these markets are not so efficient that we can’t make a profit (as long as we know where to look).

Apologies for getting all technical, but this is such important stuff, that’s so often completely ignored.

Rant over!

What I’m trying to explain is that you can’t do this on your own

To make this system work, you’ll need a little hand-holding – that way you can find the stocks which will payout, and avoid the ones that don’t.

And it’s exactly this hand-holding that James Hudson offers. Both in the pages of his dividend capture ‘bible’, and the regular emails.

I don’t believe you could be in safer hands.

Click here to try out James’s dividend capture emails for the next 60 days, risk-free

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Dividend capture – old-fashioned investing gets a face lift Yes, you CAN have a dividend income from spread betting