The Cash Management Implications of a Hedged Dividend Capture Strategy
Keith C. Brown
Scott L. Lummer
Financial Management 13, 1984, pp. 7-17
Corporate cash managers, traditionally more concerned with capital preservation than high yields, have recently begun to consider new alternatives for their investments. One potential method combines the purchase of common stock with the sale of call options near the ex-dividend date of the underlying issue. This strategy is designed to take advantage of the eighty-five percent tax allowance of dividend income while minimizing fluctuations in the stock price. This paper presents a theoretical demonstration and empirical evidence of the efficacy of such a hedged dividend capture plan. It is shown that the proposed strategy can dramatically increase the after-tax returns offered by the usual short-term investment vehicles at the same time it substantially reduces the risks associated with holding common stock.
Download this paper (PDF format)