If you're looking for a way to generate more income from your investments, you may have wondered, "What is dividend harvesting and the dividend capture strategy?"
Many investors seek companies that pay out a specified allocation of profits in the form of a dividend. Investing in these companies makes sense, as dividends comprise a significant portion of the S&P 500's total yearly return.
If you want to understand dividend harvesting and the dividend capture strategy, you'll first want a solid grasp of how companies pay dividends and when. This article will give you an understanding of how you can start using this particular dividend strategy.
Overview: Dividend Basics
Before starting with a dividend capture strategy, it's important to understand the answer to "what are dividends?" Dividends are payments that shareholders receive from companies. Even if you own an exchange-traded fund or mutual fund that holds stocks, you will receive income from stocks in the portfolio that pay dividends. The fund pays out this form of income as a fund dividend.
Companies tend to pay dividends once they are more mature and consistently profitable. You seldom see newly public tech companies offer a dividend, as these firms are either not yet profitable or opt to reinvest into high-growth projects. Even some profitable large-cap techs, such as Alphabet Inc. (NASDAQ: GOOGL) and Meta Platforms Inc. (NASDAQ: META), prefer to continue investing in growth rather than paying out a dividend.
Companies generally pay their dividends quarterly. On the corporate side, there are four steps involved with a dividend payment:
- Declaring the dividend: A dividend declaration occurs when the company's board of directors announces that the dividend will pay out. This announcement occurs regularly every quarter; this declaration is familiar to established dividend payers. However, the board can present an increase or decrease in the payment, which investors may not expect.
- Setting the ex-dividend date: This is when a stock's price reduces by an amount equivalent to the dividend per share. This price drop occurs because new shareholders won't receive the dividend. This is the date before investors must buy shares if they want the dividend payment, so it's important to know. You can use MarketBeat's dividend calendar to help you plan for purchasing a stock ahead of the ex-dividend date.
- Setting the date of record: This is generally one business day after the ex-dividend date, when a company reviews its shareholder records to determine who is entitled to receive the quarterly dividend.
- Pay date: This is the day a dividend pays out to shareholders. This usually occurs a few days after the ex-dividend date.
Dividends can be paid as cash in an investor's brokerage account or automatically reinvested. Those payment options are more common today than mailing a check. Sometimes a dividend is paid in the form of additional shares in the company's stock.
Investors should be aware that dividends are subject to taxes. You can use MarketBeat's dividend tax calculator to determine any applicable tax rates.
What is Dividend Harvesting (Dividend Capture Strategy)?
Dividend harvesting involves purchasing a stock before the ex-dividend date, then selling it on or after the ex-dividend date.
This is also known as a dividend capture strategy. These are just two different terms referring to the same process. Day traders and swing traders commonly use the strategy. Long-term investors will continue holding their stocks while collecting regular quarterly dividends. Investors who hold a stock for the longer term capture the dividend payment anyway, so the process of buying and selling doesn't apply.
How Dividend Harvesting Works
Dividend harvesting, or dividend capture, is a process whereby investors or traders hold shares only long enough to make sure they are entitled to receive the next dividend payment. Once they've met that holding requirement, they sell their shares. Many investors and traders take their proceeds from the previous sale of shares and move on to harvest dividends from another company.
This process is appealing because it involves no special knowledge of chart reading or fundamentals, such as earnings ratios. It's simply a matter of tracking dividend capture stocks through a calendar, or a dividend capture strategy calendar.
Once you've identified a stock with an ex-dividend date at some point in the future, you purchase shares before that date.
Be sure to hold your shares through that date so you are entitled to the dividend payment. You don't have to hold until the actual date of payment.
For example, say you pick out a stock and buy 100 shares on March 1, a day before the stock goes ex-dividend on March 2. When you buy, shares are priced at $10 apiece.
You then sell after the market's close on March 2. Your stock pays a quarterly dividend of 25 cents. In this case, the stock's price adjusts lower to accommodate that 25 cents per share payment.
However, keep in mind that amid all the upticks and downticks that a stock will experience during a trading session, you won't necessarily notice the 25-cent adjustment. The stock may even close higher in the session, which often happens.
The stock may close lower than the price of $9.75, which would take into account the dividend of 25 cents. If the dividend payment is larger, such as $2 or $3 or even more, you're more likely to notice the price decline as the stock goes ex-dividend.
A dividend capture strategy has its risks. For example, if the stock falls more than the dividend paid, that can cut your net profit. You'd want to wait for the stock to move back to the purchase price before you sell, but there's a chance it will continue declining before it rebounds.
If you're using the dividend harvesting strategy, keep the tax consequences in mind. If you hold the stock for at least 60 days within the 121-day window that begins before the ex-dividend date, you can receive the lower capital-gains tax rate rather than your dividends being taxed as ordinary income.
How You Can Profit from Dividend Harvesting
Identify dividend capture stocks with ex-dividend dates in the near future to profit from dividend harvesting.
Once you've identified a stock, you purchase shares prior to the ex-dividend date, then sell on that date or any time afterward. If the share price declines on the ex-dividend date and eliminates or reduces the advantage of the dividend, you may want to wait for the price to rally again before selling.
For example, if you purchase a stock with a dividend harvest trade in mind, and then it declines more than your dividend payment, you may wish to hold long enough to get back to even. However, there's no guarantee the stock will rally soon enough for you to avoid losses and opportunity costs.
Steps to Execute Dividend Harvesting
So where should you begin the process of dividend harvesting? If you've decided this strategy is for you, here are the steps to capture dividends.
Step 1: Find your stock using a dividend screener.
To execute a dividend harvesting strategy, begin with the MarketBeat dividend screener. This is a fast and easy way to select stocks according to yield and payout ratio, ex-dividend date, market capitalization, analyst rating and other metrics.
This screener offers many options for selecting a stock right for your objectives and risk tolerance. It's not necessary to consider fundamentals when screening for stocks, but you may have certain investment criteria you want to stay within.
Step 2: Check the dates in a dividend calendar.
A dividend capture calendar, such as MarketBeat's dividend calendar, allows you to screen by ex-dividend date. This calendar also shows you the record date, or the date you need to own shares to receive the dividend. To properly execute a dividend harvesting strategy, you must have those dates handy to avoid buying too late or selling too early.
This calendar also gives you the payable date, which is important to know. However, you don't need to hold your stock until the payable date to receive your dividend.
Step 3: Buy shares before the ex-dividend date.
To successfully use the dividend harvesting strategy, you must purchase your shares before the stock's ex-dividend date. If you purchase shares on the ex-dividend date, you've missed the dividend for that quarter.
You can purchase the shares for dividend capture using either a taxable brokerage account, or an individual retirement account (IRA).
Step 4: Sell on or after the ex-dividend date.
To capture your dividend, you must sell sometime after the ex-dividend date. Suppose you are concerned about the tax treatment of the dividends. Consider limiting your dividend-capture trades to qualified accounts such as IRAs or Roth IRAs. In the former, your dividends won't be taxed until you take the required distributions from your IRA. If you hold your dividends in a Roth IRA, your dividends are not subject to taxation.
Why Dividend Harvesting Might Fit Your Needs
If you are interested in a strategy for generating income through dividends but you don't want to spend time doing in-depth fundamental research or poring over stock charts, dividend harvesting may be right for you.
However, remember that the strategy only works for those who adhere strictly to the steps of identifying before the ex-dividend date and then selling after that date. It's also important to keep track of whether any reduction in the share price may have offset your gain from a dividend.
FAQs
Here are some frequently asked questions regarding dividend harvesting, also known as dividend capture.
Is dividend harvesting profitable?
Dividend harvesting can be profitable for investors who follow some basic steps. It's important to purchase a stock before the ex-dividend date and sell it afterward. A trade may not be profitable if a stock declines more than the dividend amount.
How long do you have to hold a stock to get the dividend?
You must hold your stock until after the ex-dividend date so the company recognizes you as a shareholder of record, entitled to receive the dividend.
If you are concerned about the tax treatment of your dividends in a taxable account, you must hold the stock for at least 60 days to receive the lower capital-gains tax rate.
Is it good to collect dividends?
Dividends can be an excellent way to generate income from your stocks. Even in times when stock prices are down, many companies continue to pay dividends, which help offset losses in a market downturn. This helps reduce your portfolio risk.
Dividends of stocks held for longer than 60 days can be taxed at lower capital-gains rates, rather than as ordinary income, making dividends an important part of an investment strategy.
