What Is a Dividend Rollover Plan?
A “dividend rollover plan”—also known as a “dividend capture strategy”—is an investment strategy in which the investor purchases a dividend-paying stock shortly before its ex-dividend date. The investor then sells the shares shortly after the dividend is paid, hoping to secure a short-term income stream.
What Is A Dividend?
- A dividend rollover plan is an investment strategy designed to produce short-term income.
- It involves buying a dividend-paying stock shortly before its ex-dividend date, and quickly selling it after the dividend has been paid.
- Users of the dividend rollover plan must be mindful of the various risks involved in the strategy, as even minor variance in the post-dividend share price can cause the transaction to become unprofitable on a net basis.
How Dividend Rollover Plans Work
Users of the dividend rollover plan hope to generate income from the dividend payment while quickly recoupling most or all of their capital investment from the sale of the shares.
In practice, however, the dividend rollover plan is not reliably effective. This is because, in most cases, the price of a dividend-paying stock will decline after the dividend is paid, by an amount equal to the dividend payment.
If this occurs, then the investor would secure a small loss on the sale of the shares, offsetting the gain from the dividend and producing a break-even transaction. In such cases, the strategy may be unprofitable on a net basis, after accounting for trading fees and tax implications.
Real World Example of a Dividend Rollover Plan
To illustrate, consider the case of a dividend-paying company which announces that it will distribute a dividend of $2 per share, with an ex-dividend date of March 16th. An investor using the dividend rollover plan could buy shares in the stock on or before March 15th, and then sell the shares on or after March 16th.
Although this transaction would effectively “capture” the $2 per share dividend, whether the transaction is profitable on a net basis depends on the movement in the company’s share price, as well as other factors such as the investor’s transaction costs and tax position.
For instance, suppose the company’s shares trade at $25 and only decline to $24 following the payment of the dividend. In that scenario, the investor might hope to generate a profit of $1 per share on the transaction: buying at $25, receiving a $2 dividend, and then selling for $24. To the extent that the investor’s transaction fees and tax liabilities add up to less than $1 per share, then this strategy could be viewed as successful.
If, on the other hand, the share prices moves to $23 or lower following the dividend payment, then the transaction will have been a failure. After breaking even on the gross proceeds, the investor would take a loss after accounting for their other costs.
Another factor weighing against the dividend rollover plan is the issue of risk. In the above examples, a prudent investor would demand some risk premium to reflect the fact that they cannot predict with certainty how the share price will move following the dividend. It is entirely possible, for instance, that the share price could move below the $23 breakeven point—due, for instance, to negative news unrelated to the dividend payment.
For these reasons, users of the dividend rollover plan should be careful to only apply the strategy to companies whose historical post-dividend price movements have consistently demonstrated that the strategy will likely be viable.