What is a Dividend Rollover Plan

A Dividend Rollover Plan is an investment strategy in which a dividend-paying stock is purchased right before the ex-dividend date, which gives the purchaser the right to the dividend, with the position being sold off shortly after the ex-dividend date. The intention of this practice is to reap the value of the dividends while profiting on the shares. Ideally, this strategy is designed to maximize short-term return on shares while minimizing risk. It is also known as a "dividend capture strategy."


What Is A Dividend?

BREAKING DOWN Dividend Rollover Plan

Dividend Rollover Plan Example

For example, suppose that XYZ Corp. announces that it will distribute a dividend of $2/share and that the ex-dividend date will be on March 16. An investor can attempt a dividend rollover plan by buying the XYZ Corp. stock on March 15 (or any other day before the March 16) and then selling the shares on March 16 to regain most of the purchase value of the shares. The investor will capture the $2/share (the dividend's value).

Proponents of dividend rollover planning argue that immediate returns on investments are made while reducing risk. However, opponents of the strategy believe that the expected dividend value is already incorporated into the stock before the ex-dividend date because the market anticipates the dividend payout.

Risky Strategy

Dividend capture plans entail a fair amount of risk and require knowledge of the dividend-paying stock's historical price movements around dividend dates. When a company pays a dividend it is merely taking money from its pockets and handing it to shareholders. So for example, when XYZ Corp. pays that $2/share dividend and the stock is trading at $25, the share price is ordinarily adjusted to $23. The investor who bought the shares simply to get the dividend would only be getting the return of his or her own money, with tax consequences as well.

But not every stock adjusts to a dividend payout in the same way. Some may adjust more or less than the dividend either immediately or during the trading day or even days after the payout. That's where the capture strategy can profit, either for those long in the shares, or short sellers, who are betting the shares will decrease in value.

Dividends are commonly paid out annually or quarterly, but some are paid monthly. Traders using the dividend capture strategy prefer the larger annual dividend payouts, as it is generally easier to make the strategy profitable with larger dividend amounts. Dividend calendars with information on dividend payouts are freely available on financial websites.