A “Real” Dividend Capture Strategy That Yields 19.1%

Here’s the truth about dividend capture…

“Does Brett know of a fund that employs a dividend capture strategy?”

Our customer service guru Jonathan has fielded many questions of this flavor in recent weeks and months. And thanks for asking, because I do! Hat tip Wall Street Journal:

“Alpine Woods Capital Investors LLC has employed dividend-timing strategy quite successfully in its Alpine Dynamic Dividend Fund, but the firm believes its approach will work even better in its first closed-end fund.

“The new closed-end fund combines three strategies —dividend capture, value and growth—to maximize the amount of distributed dividend income that qualifies for the reduced rates and to find companies globally with the potential for dividend growth and capital appreciation.”

Sounds awesome, right? So when are we adding the Alpine Global Dynamic Dividend Fund (AGD) to our portfolio?

Well, never. The article above was written in 2006, which means the fund has a 13-year track record. An awful track record. Its initial investors are still down a half-percent–and that’s before we consider inflation!

Sweet Strategy, Team

The fund still yields 8% today. If history is any guide, investors who own AGD will lose their dividends to price declines in the fund.

Why is AGD such a dog? Well, at its core, this strategy is a bit too “basic” to actually make money.

Let’s say you and I want to do better than AGD on our own (a pretty low bar). We would pick an individual dividend stock to buy before its dividend is committed (its “ex” date). Then we’d dump it the next day.

Money for nothing and our yield for free. We’re just trying to capture the dividend without holding the stock for very long.

But can we really buy a stock the day before its dividend date and pull this off? Unfortunately for us other investors have thought of this. They already own shares and they are selling at an inflated price. In fact, the stock is probably “overpriced” by the amount of the dividend it’s about to pay!

So we move our timeframe back. Let’s buy the stock a week or two ahead of its dividend date. Well, again, we’re not the only investors who have this idea. They’ve been bidding the price up slowly for weeks and even months. Their net effect is the “market” pricing in the future dividend at any given moment.

Then we have the Rational Dividend Capture A (HDCAX) fund, which employs the name but not the strategy. To be honest I’m not actually sure what the fund does. Supposedly they look for high quality dividend stocks and time their entries using “technical analysis to identify rates of change, trend input, cycle analysis and economic factors.”

Sounds fancy but again, it doesn’t work. Misguided dividend capture investors would have been better off buying a high quality income fund such as the Vanguard High Dividend Yield Index (VHDYX)…

Full story at Contraran Outlook