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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