This last 3 month period in the stock market has taught me dividends are one aspect of the market that really helps out the investor in a Bear Market cycle. One method of investing in times like this is using a Dividend Capture Strategy which basically takes advantage of the fact that in most cases to qualify for a stock's dividend you only need to own the stock at close of one certain day per quarter.

Amazingly, you could own a stock for nearly three months straight, but if you sold before the end of the day before the stock's Ex-Dividend Date, you would not be entitled to the dividend. Whereas if you scooped in at close and bought the stock you would be entitled to the quarterly dividend of that stock. You can then sell the stock the next day and still be entitled to that dividend, literally owning the stock for less than one day as long as you time it right. This high risk investment strategy is basically what Dividend Capture Investing is. Quickly moving in and out of of high yielding stocks to maximize short term profits through the dividends.

While this strategy sounds great most of the research I did on the subject was very negative on the strategy. One detraction to this strategy is that the stock price will fall by the dividend amount on the Ex-Div Day meaning if you bought a stock for $10.00 a share with a 25 cent quarterly dividend, the next day the stock would open at $9.75. Some say why not just wait and buy when the price falls, but by owning the stock before the Ex-Div you lock in some profits and provided the company does not cut or discontinue their dividend in the future (which happens all too much in these economic conditions) you can hold this stock for long term and continue to rake in the nice yielding dividend every quarter. I have also found most stocks trade differently around their Ex-Div date, higher right before and lower after, however the market swings affect the stock price more than people reacting to the dividend.

So its not just about buying the stock the right day but also on the right downswing or upswing of the market as its no fun to buy a stock for its 12% dividend (meaning 3% immediate return on the quarterly dividend) only for the stock to fall 50% in value as one stock I nearly purchased did a few weeks ago. XL Capital (XL) had a great yield of 12%+ in early December. However, if I had purchased about $1,000.00 worth of shares (165 @6.05) using the dividend capture strategy I would have made a quick profit of 19 cents a share or $31.35. Not bad at all for one day, however it would have been a very rocky next few days as XL Capital's stock price crashed to $2.65 making your dividend profit a meagerly fond memory as you'd be down over $560.00 and probably facing a steep margin call from your brokerage. And yes the price has stabilized a little and currently sits at $3.33, but overall you are still down over $415.00 not counting any brokerage commision fees.

So now you own a stock yielding over 34% which will be great for the next quarterly dividend payout, that is if there is another dividend coming. Many times when a company is having difficulties a juicy dividend is heavily slashed or even discontinued completely. Moody's also would have jumped on the pile on top of you when they cut XL Capital's debt rating a week ago citing "expressing concern over the insurer's profitability and capital adequacy".

While I do think XL Capital has a good chance to recover to that $6 range it might take a very long time and many investors might not be able to stomach the waiting game in this very volatile Bear Market. Even worse, if XL Capital were to declare bankruptcy you would most likely lose everything for that very short lived 3% gain.

While XL Capital is a worst case scenario it definitely proves that if you are not cautious, this strategy can wipe you out. But on the other hand, if you invest in high quality companies with good balance sheets (no debt is a big plus in this environment) this strategy can work as I have made more profits on my dividend plays than on my pure stock plays. Of my first dividend capture plays I have made profits on 80% of my plays (CBS, FTR (Frontier Comm), HD (Home Depot), AINV (Apollo Investments), and only have 1 stock I'm stuck with a loss on, PEG (Public Service Enterprise Group), which is an electric utility company that I'm not too concerned about as longterm it'll bounce back (its definitely no XL).

The jury is still out on my latest dividend plays: GE, MO (Altria), & HLYS (Heelys); but I like all 3 of their balance sheets and prospectives for the future. In fact, GE and Altria are two stocks I would have no bad feelings about holding for more long term as both are very solid companies that have been around a long time and not going anywhere.

Despite my "success" rate I am still very slow to pull the trigger on my future dividend capture plays as when I looked back at many stocks I almost pulled the trigger on (XL, RGC, HOG (Harley Davidson), GCI (Gannett- or USA Today's parent company), TU, and many others; the majority of them would have been losers. As you can see one bad choice can wipe out virutally all your profits in a matter of days if you are not careful.

So why do I still employ this risky strategy? Because I do a lot of homework on my dividend capture plays, literally hours of research before I'll pull the trigger. I will look at the stock price history (i.e. if the stock just rose 10% probably not the best time to buy). Windstream (WIN) is a great example of this. I love this company, a smaller but stable telecom with a great yield (10% right now) however I traded WIN in the past in the 8's. Its now in the mid 9's and goes Ex-Div 12/29. I could see buying this stock and seeing the price fall back to $8.00 a share, where I originally bought it back in Novermber before unloading it at $8.79. While I feel Windstream is a great company I don't like the timing and the risk/reward and I passed on it for a capture play this time.

Besides doing my own research, (as I do admit I'm still very new to the Market and have much to learn and experience) I also read as much as I can about a stock that I am targeting from every respectable stock analyst possible. Jim Cramer is a guy I respect although I am very careful when he "blesses" a stock as they don't always go up afterwards. I like gathering as much information and opinion from analysts, positive and negative, before making the move. And I also realize this current market is gambling and its just as easy to lose as it is to win as the "House" odds should be in our favor in general, but right now it is not as the Market has a very Bearish tone to it. The only real protection in this market is time as eventually the stock market will climb out of this Bear Cycle and when it finally does every good, fundamentally sound company's stock should rise precipitously.

So if you do decide to try this strategy I advise you to tread very carefully and definitely don't invest with money you can't afford to lose. While I do like my odds with this market (especially over time), I do see this current market closer resembling a casino than anything else and really no one knows where this market or our economy is headed next in the short term. I personally expect much turbulence in 2009 as we very slowly pull ourselves out of this "Great Recession". I am optimistic about the future of the market but I also expect great volatilty in the year to follow as we definitely aren't even close to being out of the woods just yet.

January '09 Update: I have just sold PEG for a small profit clearing me of my early December plays and I have added AT&T (T), and BBT Corp (BBT) to my plays and and looking to add Kinder Morgan (KMP) later this month if I can find a good entry point. In late January I have sold my Altria (MO) for a good profit with intentions to buy it back cheaper down the road along with my KMP position. I have added to my GE, AT&T & BBT positions as those 3 have had a rough January but I feel their 2009 dividends are safe for now, and this brings my average price per share down making it easier to unload these shares the next time they rally a little. I also have bought some Alcoa (AA) right at the end of month month which will yield 8%+ in early February when it goes ex-dividend.

February '09 Update: As the market continues to become more unstable and more and more companies are slashing their dividends (2 of my December dividend plays have already drastically cut their dividends, CBS & AINV) I have become more and more selective with my dividend plays and am actually making more money playing the SDS or the DXD (x2 short ETF's tracking the S&P and DOW respectively) even though I am using those ETF's as a hedge for my much larger long positions. I am still holding my positions in GE, T, BBT, & HLYS despite possible future dividend cuts but luckily have unloaded Alcoa (AA) for a small profit before it crashed into the 6's. I have also bought a very small amount of GDV, a Mario Gabelli fund that pays a monthly dividend, which is down a decent amount but I plan to add to this position before it goes ex-div next month. I've also added a large position in Walmart (WMT), not for its small dividend but for its stability in this very tricky market right now. I expect many more dividend cuts so I will most likely become more and more selective in my future capture plays.

Final Update 6/27/29: Sorry for my lack of updates but I have found its impossible to keep up with writing when delving deeper and deeper into the market. I doubt I'll have time to update my dividend plays (which are very rare now) but you can keep track of my progress at covestor now: The link to all my trades & stock positions at Covestor

While I do continue to play some of my fave dividend paying stocks like Altria (MO), Windstream (WIN), Home Depot (HD), and some others; for the most part I am now trading long and short in shorter time frames as this market is very hard to predict where its about to go next.

One place I do recommend any new trader to check out is Tickerville.com as the Q-Man's tape talks have been a big help to me as he teaches technical analysis which is something every trader should follow even if they are a "fundamentalist" like I feel like I am.

All in all I feel the market is still a great place to make some money especially with a longer time horizon but also more adept than a casino to take all your money if you don't have proper risk reward machanisms in place. 

And BTW as of Friday XL Capital is at $10.85 a share so if you didn't get stopped out or get a margin call when XL fell to $2.56 in early Feb. you'd actually be doing okay right now.