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As a Dividend Growth Investor who invests in dividend stocks, typically I expect to receive 4 dividend payments each year. Of Course, there are exceptions. Companies like Realty Income will pay once a month while European companies like Ahold Delhaize tend to pay out once maybe twice a year.
Those who follow my monthly updates or listen to my podcast will know that I incorporate options in my portfolio. More specifically selling cash-secured puts and selling covered calls. For the most part, this has served me well. However as I am new to this, I am always going to make a few mistakes along the way.
Those mistakes mean I have companies like $SOLO and $WISH sitting in my account. While I am selling covered calls, the premiums are hardly worth the effort, and I am forced to either hold them and wait for them to come back or sell them at a loss and reduce the income I received from selling puts.
Lessons Learned
I can read all of the books in the world, but honestly, I have always learned by just DOING. Making mistakes is just part of the process. The important part is to not make the same mistake again.
- Lesson 1. Do not chase premium as it will always come back and bit you in the ass.
- Lesson 2. Only sell Put on companies you are comfortable holding long term
As a dividend growth investor, it seems logical that I should target these types of companies and it would certainly help me sleep better at night.
The downside is that the premiums are usually much lower but you can’t have your cake and eat it.
At this point, I was wondering If I could combine some of my options trading and capture some extra dividend income along the way.
https://www.buymeacoffee.com/dividendtalk
The goal is to collect as much extra dividend income for the same amount of euros invested. My strategy is to own the stock for the shortest period of time but still collect the dividends on the way.
Dividend Basics
1. Declaration Date
The declaration date is the day that the company declares that it will pay a dividend. With this declaration, the company announces how much it will pay, the ex-dividend date, and the payment date. Most reliable dividend-paying companies keep to a regular declaration schedule adjusting for weekends and holidays.
2. Ex-dividend Date
At the ex-dividend date, buyers of this stock will no longer be entitled to receive the declared dividend and the stock is said to thereafter trade without dividend. Before trading opens on the ex-dividend date, the exchange will mark down the share price by the amount of the declared dividend. However, this does not mean the stock’s opening price will be down from the previous close.
For example, NewCo Inc declares a €1 dividend with an ex-dividend date of May 5th. Anybody who buys the shares on the 2nd, 3rd, or 4th—or any date prior to the 5th—will get that dividend. Anybody who buys on the 5th will NOT get the dividend.
Another important note to consider: as long as you purchase a stock prior to the ex-dividend date, you can then sell the stock any time on or after the ex-dividend date and still receive the dividend.
3. Record Date
The record date is simply the date where the company looks at its ledger and determines to who they send the dividend checks to. At present, the record date is always the next business day after the ex-dividend date.
4. Payment Date
As the name suggests, the payment date is the date on which a company actually pays out its dividend.
Dividend Capture Strategy
Inspired by Lynyrd Skynyrd’s song, Simple Man, I always like to keep things as simple as possible.
As an engineer, sometimes we fall into the trap of over-complicating everything when the solution is usually the easy and often overlooked option.
With that said, here is the strategy:
- Chose a company with a dividend yield of 3% or More
- Buy 100 Shares of the company
- Sell an ITM put option to expire on the ex dividend date
- If the stock is above the strike price, I am assigned
- Collect dividends
- If the stock is below the strike price
- Collect dividend
- Sell Covered Calls
Dividend Capture Strategy Live example
I think you will agree, on the face of it, it looks like a pretty simple strategy. But does it work?
Let’s take a looks at a live example where I tried this with Verizon this week.
Initially, I had charted some near-term support and resistance levels. I had earmarked ~$50 as support and ~$53 is as resistance. I bought 100 shares just as it broke through the resistance level on Wednesday evening (Irish time)
If you are interested, I use Tradingview to chart my thoughts. consider using my aff link if you are thinking about signing up for a pro subscription. Although in my honest opinion the free version is more than enough.
At the same time, I sold an ITM Covered Call at $51 with a premium of $2.26 with an expiry date on the 7th (ex-dividend date). So here are my back of the napkin (on a spreadsheet) calculations
My break-even price = Purchase Price – ( Dividend Amount + Premium collected). I was happy enough with this as even If the stock was to take a dip over the next couple of days it would be close to my resistance level and I would have been comfortable selling a second covered call at this rate.
I was however expecting the company to finish slightly above $51. This meant I would have been obliged to sell the shares at $51. The premium I received from the covered call would have covered the difference in the loss I made on the share price and I would have been left with the dividend.
What Actually Happened
Everything seemed like it was going to plan with my dividend capture strategy. I checked the account around 1 hour before the market closed on Thursday and the company was trading at $54.
But I forgot, overlooked, and neglected one key element. EARLY ASSIGNMENT. My covered call was so deep in the money It only makes sense for it to be called away.
If I sat down and thought about it, the person on the other side is getting a good deal. They paid $2.26 per share for the right to buy shares at $51. It was now trading $3 above the strike price and they would receive the dividend payment if they exercised their option.
It is a no-brainer that with this Kind of setup I will get early assignments 99 times out of 100.
The Bottom Line
It is quite clear that this particular dividend capture strategy does not work as I have laid it out. There is no such thing as a free lunch.
On this occasion, it would have actually been more profitable to buy on Thursday night before the bell closed as the price actually increased on the ex-dividend date and I still would have got the dividend.
If you would like a copy of the template I use to perform fundamental analysis then feel free to grab your copy below. I explain how I use the template here!
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Thanks for sharing this strategy, Derek! I’ve also been exploring how to combine dividend growth investing with selling covered calls but hadn’t thought of this one.
Well it didnt work, but maybe there is a better way