The Stoic Value Investor Newsletter

The Ultimate Dividend Capture Strategy to Unlock 3%+ Cash Returns Within 2 Weeks

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Read time: 3.5 minutes

Key Takeaways

• Increase your returns from capturing dividends by earning additional premiums from writing option contracts.
• The strategy in a nutshell: sell a put, capture the dividend, sell a call.
• Benefit from an asymmetric risk-return-profile since it's a strategy too complex for retail investors and too niche for the big players.

I will let you into a secret strategy how you can increase your returns on dividends.

This strategy, practised by Matthew Peterson, a money manager running a value investment fund, is not your typical, plain vanilla dividend capture strategy.

Usually, when investors try to capture excess returns by purchasing a stock just before dividends are paid out, they fail. Because:

Dividend capture strategies have no real edge.

The reasons for this is:

• The stock price will generally drop in the amount of the dividends paid out, i.e. it's a zero-sum game.
• Since the company's cash balance is reduced, the value of the company is reduced as well (see reason #1).
• The information about dividends are widely available and published in advance.

So why then should the strategy I'll explain below, yield excess returns when I just proclaimed that dividend capture strategies don't work?

And why isn't everyone doing it if it's so promising?

The answer is simple:

This strategy is also leveraging stock options to increase returns. And therefore, it's too complex for the most (retail) investors but at the same time too niche for the big players like investment banks.

However, it promises 60-80% return p.a. when done right - with minimized risk.

That's something that lets every Value Investor sit up and take notice.

Now, let us see how this all works:

The Structured Dividend Capture Strategy

The general idea is simple:

• We have cash that doesn't return much and therefore we use this strategy to increase cash returns.
• By selling a put option a week before the ex-dividend date we earn a premium and might get the stocks put to us.
• If the put option is exercised we get the stock just before the ex-dividend date and receive the dividend payment.
• We then sell a call option to get rid of the stock. For this we receive another premium.
• Once the call option is exercised we end up back with cash on our portfolio.

Step 1: Finding the right dividend paying company

First, we need to find suitable companies with high enough dividends that make our work worthwhile.

Since this strategy tries to minimize the time we hold the stock, we just want to make sure that we don't hold stock of a company that has a very volatile stock price or business operation.

Therefore, we want to look at debt ratios, stable revenues & margins and potentially at the stock price movements around dividend dates (and earning reports). Usually, those companies are found in the leading indices (i.e. blue chips).

Step 2: Sell a put option

Once we have found a company, we then look to sell a put option that expires just before the ex-dividend date.

Selling a put option gives someone else the contractual right to "put" their shares to us. In return, we earn a premium for that obligation.

Once the put option is exercised we get the shares just in time to reap the dividends.

If the put option is not exercised we keep the premium and move on to another situation. 

Step 3: Capture the dividend

Given that we now own the shares, we then collect the dividends.

Step 4: Sell a call option

Right after we are eligible to receive the dividends (or also right after we got put the shares) we sell a call option.

This gives someone the right to "call" the shares away from us. Again, we earn a premium.

If the call option is exercised we receive cash and end up at the beginning. But with a higher cash balance.

If the call option is not exercised we simply write (or sell) another call option. We repeat this step until we get rid of the shares. 

Some departing thoughts

Of course, there is no free lunch. There are risks involved.

For example:

• The stock price plummets and we are forced to take a loss on the equity price and might therefore have to sell the call option at a lower strike price than we would have otherwise.
• There are unforeseen events (e.g. stock market crashes) that might negatively impact our holdings during the process.

Therefore, we want to consider companies that we would be okay with holding their stocks for a longer period, regardless.

And then there is the amount of work that we need to put in to pull this off. We need to gather information about the dividend schedules of listed companies, their fundamental data and the stock option pricing data. All this information needs to be processed. 

And this is best done by a program. 

So, is this working?
Yes, as can be read in Matthew Peterson's letters to shareholder.

Is it risk-free and easy to do?
Far from it. That's why most investors will not concern themselves with this strategy.

But is it worth to do the work to reap 3% in two weeks and potentially repeat it 20 times a year?
I let you decide.

Happy investing.

Disclaimer: This article is for information and educational purposes only. None of the information contained in this article should be construed in any way as financial, investment or other professional advice.