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.
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