Thinking of using a dividend capture strategy? Investing this way is unlikely to pay off for you, so focus on high-quality dividend-paying stocks to profit instead

Dividend capture strategy investing can pay off when stock markets are rising. Of course, any strategy that leads you to buy can pay off when stock markets are rising. But as great as it sounds, individual investors will have a hard time making a profit.

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Understand dividend capture strategy investing before trying it so you can keep your portfolio in order

A dividend capture strategy is the trading technique of buying a stock just before the dividend is paid, holding it just long enough to collect the dividend, then selling it. If you can sell it for as much as you paid for it, you have “captured” the dividend at no cost, other than the transaction costs.

To use dividend capture strategy investing, you would buy a stock just before the ex-dividend date, so that you would be a shareholder of record on the record date, and would receive the dividend. Because the stock may then fall by the amount of the dividend on the ex-dividend date, a dividend capture strategy then calls for you to wait for the stock to move back to the price where you bought it before the ex-dividend date. At this point, you sell the stock for a break-even trade—but pocket the dividend.

Dividend capture strategy investing may have appeal for securities dealers or brokers executing huge trades with very low transaction costs. But for the average investor, there’s little chance of making a significant profit.

That’s because you have to pay a brokerage commission to buy the shares you need for this strategy and a commission to sell. The commissions can eat up much of the dividend income. They may exceed the dividend income.

In addition, the mechanical aspects of the strategy may lead you to disregard the three key parts of our Successful Investor approach: investing mainly in profitable, well-established, mostly dividend-paying companies; spreading your investments out across most if not all of the five main economic sectors; and downplaying or avoiding stocks in the broker-media limelight.

Focus on high-quality, dividend-paying blue-chip stocks instead of using dividend capture strategy investing for long-term gains

You can still look at blue chips as the strongest and most secure stocks on the market. High-quality blue-chip companies are good to invest in. Blue chip companies are typically defined as firms whose stocks have a national reputation for quality, reliability and the ability to operate profitably in good times and bad.

Here is a look at four of the top characteristics of blue-chip stocks to invest in

Blue-chip investments should pay dividends: Review a company’s 5- to 10-year record of paying dividends. Companies can fake earnings, but dividends are cash outlays. If you only buy dividend-paying value stock picks, you’ll avoid most frauds.

Good blue chips have low debt: It doesn’t matter if you’re investing in blue chip stocks or penny stocks, the company under consideration should have manageable debt. When bad times hit, debt-heavy companies often go broke first.

Blue-chip investments should have industry prominence if not dominance: Major companies can influence legislation, industry trends and other business factors to suit themselves.

Good blue-chip investments have the freedom to serve (all) shareholders: High-quality stock picks must be free of excess regulation, free of dependence on a single customer, and free from self-dealing insiders or parent companies. Canada-wide is good, multinational better. There’s extra risk in firms confined to one geographical area.

Learn how to tell if a stock will keep paying a dividend with four helpful tips you can use in any market

1. Look for companies with a long-term record of success. These companies are the most likely to keep paying and increasing their dividends.
2. Check the current financial health of a company. If a company is doing well, has done so consistently, and shows signs of ongoing growth, these factors are indicative of stocks that will keep paying a dividend.
3. Look at a company’s current dividend. If a company currently offers a healthy dividend, this is a good sign of its potential to continue offering a steady dividend.
4. Note the competition. Look for companies with a strong hold on a growing market and a unique product or service that cuts its competition.

Look for top dividend-paying stocks that have the following characteristics:

• They provide regular income
• They are one of the dominant firms in an industry
• They feature hidden assets
• They are high-quality, proven companies
• They operate a well-established business
• They have strong management and balance sheets
• They have manageable debt

Above all, for a true measure of stability, focus on stocks that pay a dividend they’ve maintained or raised during economic or stock-market downturns. That’s because these firms leave themselves enough room to handle periods of earnings volatility. By continually rewarding investors, and retaining enough cash to finance their businesses, they also provide an attractive mix of safety, income and growth.

A track record of dividend payments is a strong sign of reliability and a sound indication that investing in the stock will be profitable for you in the future.

Some analysts believe dividend stocks are overrated and focus more on current cash flow. What are your thoughts on this?

The price of dividend stocks can be high. Do you feel it is worth the price or do you prefer to buy lower-priced stocks that are on a promising growth curve?