MONEY9: Some INVESTORS invest in certain stocks only for dividends and also earn a decent return. With an example, Sandeep is a keen investor in the stock market but his friend Rahul is still taking steps. Rahul often asks Sandeep for tips. For the last few days, questions have been rising in Rahul’s mind about dividends. He does not know how to play this game of dividends. So he reached out to Sandeep and started questioning him.
Rahul: Brother, I also want to earn through dividends… so what to do?
Sandeep: Hey, why are you worried? Many investors take advantage of dividends by entering at the perfect time and then selling the shares to get the money back. This is a game.
Rahul: Yeah Al that sounds pretty crap to me, Looks like BT aint for me either.
Sandeep: This is called a dividend capture strategy.
Many investors buy shares that earn good dividends as well as returns.
However, some investors take advantage of dividends through a dividend capture strategy. You need to be careful in this strategy, because you have to buy and sell stocks in a timely manner… that is, if there is a dividend in one hand, sell the stock in the other hand. Shares are bought before the ex-dividend date and after the record date, the shares have to be sold.
Rahul: What is this record date?
Sandeep: Let us understand by an example.
Suppose a company called XYZ declares dividends on April 12, 2022. The company has set a record date of April 16, 2022 for it. That is, only those who have shares up to this date will get dividends. Thus, April 15, 2022 will be considered as ex-dividend date.
The investor who buys the stock even one day before the ex-dividend date will get the dividend benefit. Dividends are due on April 19, 2022 to all valid equity shareholders. So between these dates any investor can make money through dividend capture strategy.
The investor buys his shares at any time after the company announces dividend on April 12. But one thing to keep in mind is that the purchase must be made before the ex-dividend date. That is, the only time to buy is between April 12 and 14.
During this window, if the investor buys the shares of the company, he will have to keep the shares till the record date. After the record date, he can sell the shares and withdraw his investment on any day he wants, he will get dividend. Thus, even with a few days’ investment, it will earn a good return. But one thing to keep in mind is that most stock prices fall on an ex-dividend date.
Rahul: Well, if I invest in stocks in the lure of dividends and if stocks fall, I will lose.
Sandeep: Hey, dude, there’s a way out. In such a scenario, investors have technically three options.
Option 1
The first option is to sell the stock as soon as the market opens on the day of the record dividend date. If the stock goes down in that time, the decline will be negligible and you will gain instead of losing, because dividends have to be paid.
Option 2
Now, the second option is to keep it until the stock price rises. If the stock is strong, there is no question, but if it is down, wait for it to rise again. Sell when the price goes up.
Option 3
The third option is to hedge the position of this stock in futures or options trading.
Sandeep: Now, you must have understood that if the share price breaks down on the ex-dividend date, you can use the futures or options contract of that stock to avoid this loss.
Rahul: Thanks, Sandeepbhai. You explained the game of dividends to me very nicely.
Money Nine’s advice
- Dividends on stocks give you a good chance of getting a return. You should take this opportunity fast. But be careful, you have to be very careful in this.
- If you delay selling shares, you may be trapped for a long time. But if you have surplus cash, you can keep investing in stocks.
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