I'm sure most investors out there (and especially those who love their dividends) will have had this thought at least at some point in their investing career – "why not buy a share before it goes ex-dividend and then sell it?". We can call this strategy 'dividend harvesting' and it's a counterpoint to the traditional 'buy-and-hold' strategy that many dividend investors employ.
Does dividend harvesting work?
That's a tricky question to answer. The first thing to note is that there is no free lunch with dividends. You will notice that when a stock goes ex-dividend, the share price will normally drop to match the departing yield: just take a look at the Commonwealth Bank of Australia (ASX: CBA) share price this week to see this in action.
Another thing to note is the performance of an exchange traded fund (ETF) that follows this strategy. The BetaShares Australian Dividend Harvester Fund (ASX: HVST) has an objective to "provide investors with exposure to large capitalisation Australian shares along with regular franked dividend income, paid monthly, that is at least double the income yield of the broad Australian share market on an annual basis". The ETF does this by 'rotating' into a dividend paying stock like Commonwealth Bank or BHP Group Ltd (ASX: BHP), for example, before it goes ex-dividend and subsequently 'rotating out' following the ex-dividend date and moving on to another dividend stock. This process (or 'rebalancing') is undertaken every two months and by its use, HVST is able to offer investors a trailing distribution yield of 8.2% (or 11.2% grossed-up).
What's the catch?
If this sounds too good to be true, consider this: at the time of inception (November 2014), this ETF was trading for $$25.32 but you can pick up units of HVST today for $15.21. Since 2014, there has yet to be a year where HVST shares have finished higher than they started the year at. In other words, if you invest in this ETF, you are basically giving away capital in exchange for a higher yield.
Foolish Takeaway
I believe the tale of HVST proves that dividend harvesting is not a successful strategy. Sure, you might be able to squeeze a higher yield than just holding the shares long-term, but you are selling off the family silver to do so. For me personally, I'm just sticking with 'buy-and-hold'.
