Dividend stocks are a powerful way to invest for both income and growth. But many go searching for ways to boost their income even more, with the dividend capture strategy designed to have you move quickly in and out of stocks right as they're making their payouts. Stocks in the Dow Jones Industrials (DJINDICES:^DJI) are especially popular candidates for the dividend capture strategy because of their high dividend yields. But does dividend capture make sense for you?
In the following video, Dan Caplinger, The Motley Fool's director of investment planning, looks at the controversial dividend capture strategy with an eye toward debunking some common misconceptions. Dan notes that at least in theory, a stock that pays a dividend has its intrinsic value drop by the amount of the payout, and usually, the share price follows suit. Yet another reason to proceed with caution is that the IRS has made dividend capture a less profitable strategy, requiring investors to hold shares for 61 days surrounding dividend payments in order to get qualified-dividend tax treatment. The difference in tax can be especially high for high-yielding stocks Pfizer (NYSE:PFE), Merck (NYSE:MRK), and Verizon (NYSE:VZ), and so Dan concludes that in general, sticking with a long-term buy-and-hold dividend strategy will be more lucrative than following short-term dividend capture strategies.