The Dividend Capture Trade

About a week or so before the stock or fund goes Ex-Dividend. The Smart Money (traders who understand this Dividend Capture Trade) will start to buy in, and it's this marginal buying that starts the short-term uptrend. Day-traders see the uptrend and they jump in long, which propels the uptrend. The day before the Ex-Dividend date, the last group to buy enters the trade (The Dumb Money), buying from the first two groups.

On Ex-Dividend (the day the security starts trading without the dividend), the price will normally gap-down on the open by the amount of the dividend, as the value of the dividend has been transferred from the business or fund to the investors. As a result of the dividend payment, most charting and market data services adjust all historic prices down by the amount of that dividend, which causes all chart data points to drop down overnight before the open on the Ex-Dividend date.

After going Ex-Dividend, we often then see a downtrend caused by both the Smart and Dumb Money selling to cash out and redeploy their capital elsewhere. Once again, short-term traders seeing the downtrend and jump-in short and thus propel the downtrend.

The post Ex-Dividend downtrend end, just like all downtrends, when big Value Investors step-in and buy at discount prices caused by all the selling. This last group will then hold for many months and maybe even years, through a number of dividend payments. This last group will often sell into some future premium price that cannot be justified by the underlying economic realities of the business or fund. They also have the option to sell into a future Ex-Dividend rally.

Except for the Dump Money buying just before the Ex-Dividend date and selling just after the Ex-Div date, most traders can make some amount of money on this trade. The Dump Money often lose money on this trade after commissions, slippage, and taxes are factored in.

You can get dividend information from your broker, from Dividend.com, and from the Dividend Calendar.

By-the-way, the pay day is often a bullish day. It seems that there must be a large number of investors who must be surprised by dividend income suddenly hitting their account. They then decide Hey, I like that, let's buy more of this stock.", espicialy if it's a high yielding stock or fund.