What the eff is Nelson talking about now? He wants me to try something called dividend capturing? Is that where you hang out close to the dividend’s school at the end of the day, with a windowless van that has ‘Free Candy’ written on the side, all while sporting some big sunglasses and a moustache? No, that would be incorrect. And gross.

No, dividend capturing is actually pretty simple, at least in theory. You find a stock that pays a very generous dividend, and you buy some just before the company pays out that juicy yield. You hold long enough to be eligible to collect that dividend and then you sell the shares. The dividend is supposed to be big enough that you’ll make enough money to make this worth your while even after paying trading costs.

Let’s look at a real life example, my favorite stock, Hooters Roger’s Sugar. The company’s most recent dividend date was September 30th, which means you’d have to be a shareholder on that day for you to get the dividend. Typically the actual dividend is paid a few weeks later, because stock trades take a few days to settle. If you were to buy the stock on September 30th looking for the dividend you’d be out of luck, because it always takes three days for your trade to settle. (Of course you couldn’t anyway, since it was a Sunday.)

So you’d have to buy Roger’s Sugar on the 26th of September in order to get the dividend. September 27th is known as the ex-dividend date, which means you’re too late to buy the stock and get the dividend. Meanwhile, September 26th would be known as the cum-dividend day. Cum-dividend just means that’s the last day that you need to buy the stock to be eligible for its dividend, you pervert.

So you buy Roger’s Sugar on September 25th. It opened at $6.62 per share, eventually hit an intra-day low of $6.55, hit a high of $6.70, and closed at $6.67. Say you were smart and picked up shares for the low price of $6.55. Give yourself a pat on the back, Mr. smart trader.

HEY. I SAID YOUR BACK, NOT YOUR GROIN.

You hold the stock until October 1st. The stock opens at $6.50, which is a 5 cent loss per share. So you instead set a limit price of $6.55, (which means you’ll sell your shares at that price and not a penny below) and lo and behold, the stock hits the price. Nice work, you didn’t lose any money.

But wait, there’s trading costs to contend with. Say you’re a big shot and you bought 1000 shares. You’re using a cheap broker, so you’re paying a penny per share for each trade. Your total trading cost is $20. We’ll ignore GST/PST.

Meanwhile, Roger’s paid a dividend of 9 cents per share. 9 cents times 1000 shares is a dividend of $90. WHOOOOOO! FREE MONEY BABY! LET’S ALL QUIT OUR JOBS AND DO THIS FOR A LIVING.

Efficient market people hate that this happens, because it laughs in the face of their theories. Let me explain.

If you believe in an efficient market, there would never be the opportunity to do this. The reason? Since everybody knows the dividend is coming, wouldn’t the stock automatically just fall by that amount? Things are rarely this simple in the real world. Sure, a lot of times it will, but if you’re willing to hold on for an extra day or whatever, you can easily wait this out. Or if the market is having an up day, your dividend stock will just go up a little less than all the rest.

There’s one exception to the paragraph above, and that’s when a stock pays out a massive special dividend. We’re talking like 20% of the value of the company. The market will always adjust to that. A 20% special dividend is maybe a company changing event. A 1.5% quarterly dividend? Not so much.

Dividend capturing is awesome. It is a guaranteed way to make money, right? Weren’t we all going to quit our jobs and just dividend capture on some beach in Thailand somewhere?

There’s just one problem. The market doesn’t always cooperate. You could try this during a really crummy time for the markets, and next thing you know your shares are down 5%. Then what do you do with them? Would you hold on and hope for a comeback, or sell them for a loss? Or, what do you do if the stock suddenly has some bad news and it falls 10% during the day or two when you own it. The upsides of the strategy are limited, while the downsides could potentially be huge.

The good news is we don’t have to abandon dividend capturing completely. You’ve just got to be smart about it.

If you’re looking to buy a dividend stock as a longer term hold, take a look at the ex-dividend date. If the company just recently paid out their dividend, maybe hold off buying it until you’re in line for the next dividend. You’ll still have to make sure you’re not overpaying for the stock, but getting a dividend right after you buy a stock is a nice bonus.

Dividend capturing might work, but the risks just aren’t worth the reward. Kinda like a Thai hooker.

Tell everyone, yo!