Subtle Observation about Dividend Capture

The probability distribution of the income stream from dividend capture is similar to the income stream from regular dividends. It is largely independent of price fluctuations.

Dividend capture is a method to convert gains into dividends. This may have tax advantages. Of more interest to me, however, is that it produces a large, stable, growing income amount.

The key is to purchase a stock just before a special dividend. If sold 61 days later, the special dividend appears as dividend income and, to a first approximation, it appears as a short term capital loss as well. If purchases are limited to companies worth owning in the first place, it is not necessary to realize the loss immediately. Rather, the stock can be held until needed for another dividend capture. You would sell only when a more desirable stock becomes available or when a minimal special dividend purchase is needed. In this way, the stock portfolio consists of a stable portion and a trading portion for dividend capture. Individual stocks can move between the two portions as their prospects change.

A minimal amount of dividend capture is needed to provide a high income stream. The dollar amount of special dividends captured is important. Dividends, whether regular or special, are tied to business conditions, not to stock prices. Stock prices tend to rise and fall together, especially in the short run. To a first approximation, picking up a dividend dollar amount requires a certain number of shares, not a dollar amount of shares. Shares sold to capture new special dividends will follow the prices of the overall market.

Maintaining the income stream depends primarily on the number of shares purchased, not the price per share.

Income from captured dividends is stable, as are regular dividends. It is not as stable because individual price fluctuations do not follow the market perfectly. But both are much more reliable than prices.

Have fun.

John Walter Russell
May 27, 2007