Hedging dividend capture strategies with stock index futures

Hedged dividend capture strategies recently have become popular with corporate investors. In this strategy, an investor who is interested in dividends will purchase a value-weighted portfolio of equities just before the ex-dividend day. The strategy makes 3 assumptions: 1. The dividend amount is known. 2. The annual interest rate on borrowing and lending is nonstochastic. 3. The mark-to-market feature of futures contracts has no impact because the duration of the strategy is so short. To determine the results of a hedged dividend capture strategy, empirical estimation is done using 20 significant ex-dividend days of the 50 largest Standard and Poor's 500 between January 1, 1985, and March 31, 1986. This list is a value-weighted index. A value-weighted portfolio of the stocks was assembled, based on the closing prices 5 days before the ex-dividend date under scrutiny. The results indicate that the hedged dividend capture strategy that was estimated offered a 25% risk reduction for a 38% decrease in expected returns.