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How to Make Money Chasing Dividends

Updated on April 29, 2015

How are we going to make money?

As I have said in my previous articles, the stock market can be a very dangerous and dark alley to wander through by yourself. I hope to be the guiding light that leads you out of the dark and into greener pastures.

In this article, I wish to talk you through a strategy that a lot of investors use from time to time, including myself. After years of experimenting with the stock market, I can tell you that this strategy works the best but before going further, I need to tell you to do your homework and research before committing to any investment.

The strategy I am going to tell you about is known as 'Dividend Capture' and it is definitely, not for the faint of heart. It is a strategy that can make you a lot of money within days and with a bit of patience, you can use this strategy over and over again until you tired of making money.

How to collect the dividends?

By definition, dividend capture is for income seekers who will hold a stock long enough to collect the dividends then sell the stock in order to buy another. To be successful at collecting the dividends, the investor must pay attention to the ex-dividend date and record date of the stock. The shares have to be purchased prior to the ex-dividend date and kept until after the record date. If shares are held in the account by the record date, the account is eligible to receive the dividends declared by the company. After the record date, the shares can be sold. It is not important to keep the shares until the payment date in order to receive the dividends.

Lets work through an example to ensure that you understand the process. Company XYZ declares a dividend of $1.00 to be paid on May 27th. The ex-dividend date is May 1st and the record date is May 4th. To be eligible for this dividend, shares are purchased on April 29th rather than the 30th to be on the safe side. With shares in the account by the ex-dividend date, we are eligible to receive $1.00 per share which will be paid to us on May 27th. We check the stock price on May 5th and noticed that the stock price has risen 5%. We are free to sell the stock and still collect the dividends.

How to pick the right stock?

Once you have mastered the dates, you will find collecting the dividends is the easy part. The hard part is doing the homework to determine which stock to pick and buy. It is important to do the homework and please, don't skimp on this. If you don't take the time to research the stock, you might end up holding the stock after the ex-dividend date. The reason is because the stock price will go lower on the ex-dividend date. Stock prices will be reduced by the dividend amount on the ex-dividend date.

For our example, lets say the XYZ stock sells at $45.00. On the ex-dividend date, the stock should sell for $44.00 or less. There might be market conditions that further reduces the price.

You might ask, what else could go wrong? Plenty. In the years of watching the stock market, I have seen plenty of things that went bad. I have seen a stock plummet to its 52 week low after the ex-dividend date and never recover. People who have bought that stock was optimistic. They thought they could buy in, capture the dividend then sell it after days of holding the stock. Unfortunately for them, they are still holding the stock and waiting for the stock price to recover to the price they had paid for it.

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How sweet it is?

On a lighter note, dividend capture can make you a lot of money. A friend of mine invested in a stock that was going to pay a dividend of $1.50 per share. He bought 1,000 shares on Tuesday and held the stock until Friday when it was the ex-dividend date. By Wednesday of the following week, the stock price had recovered back to what he had paid for it so he sold all 1,000 shares. Two weeks later, he was paid $1,500.00 for the dividends. Like he said, he was sweating beads for a week because he invested over $100,000.00 in a stock. But after the week, he sold it and the money was returned to his bank account.

Where to Start?

The best place to look for stocks is on Dividend.com where you will find stocks to consider and its profile. Do look at the high yield dividends but keep your feet on the ground and research well. Check the dividend history to make sure the company has been paying dividends in the past. Also, a good sign is when a company increases the dividend.

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