Hedged Dividend Capture
Keith C. Brown
Scott L. Lummer
Midland Corporate Finance Journal 4, 1986, pp. 65-72
It has long been recognized that corporations must hold a portion of their assets in the form of liquid balances. Until recently, however, the most prevalent cash management investment policy has been to follow a rigid “safety first” principle emphasizing capital preservation over the potential for return. In this article, we examine several factors critical to the success of a program of hedged dividend capture, which attempts to satisfy the manager’s need for safety while also providing greater payoffs than those associated with the usual cash management alternatives. These factors include: (i) the dividend yield of the stock, (ii) the risk volatility of the stock, and (iii) the extent to which the option sold is in the money. We also consider how tax reforms designed to limit the corporate dividend income deduction might affect the hedged dividend capture strategy.
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