Australian (ASX) Stock Market Forum

Dividend Stripping

Jump to new
B

Blaz

Joined
9 July 2013
Posts
5
Reactions
0
Wouldn't dividend stripping be very profitable?

I know you would need to invest a decent portion of money to make it worth while but i'm failing to see how it could turn bad besides a bit of a price drop during the dividend period which is unlikely to happen isn't it?
 
nevermind, i now realise that the price can drop dramatically around the ex dividend date due to un-natural investors doing the same thing as i have in mind
 
You also have to be aware of the 45 day rule :)
 
Dividend stripping can absolutely be profitable. It can also go wrong spectacularly. Marcus Padley has written a few articles on it for the SMH, google them up and they'll cover the basics for you.

If you're on a low tax bracket (or invest thru a trust and have enough low tax bracket beneficiaries to stream the divs to) that will help when it comes to stripping divs of fully franked stocks. No it won't guarantee you profits but it will help shift the odds in your favour, since if the beneficial owner is under the tax free threshold, you'll pocket all the franking credits along with the div (though beware the 45 day rule as mentioned by others).

Another thing that can help shift the odds in your favour is that you do not need to put your entire stock position at risk. You only need to maintain an 0.3 delta for a minimum of 45 days to collect the franking credits. So if you know your way around options...
 
I think sophisticated investors and anyone but plebs, get a break on this front, but a more sophisticated member may be able to explain it better than me.
 
Just to make sure I have my head around this properly.

Say I make $50,000 this year trading futures and CFDs and collect zero divs. I will have a tax bill of $18,500.

I then run a div strip strategy that breaks even for the year + collects $5k in franking credits.

At tax time my bill for trading will be $13,500.

PS tax sucks, no wonder I have been focusing on longer term investing lately
 
fiftyeight said:
Just to make sure I have my head around this properly.

Say I make $50,000 this year trading futures and CFDs and collect zero divs. I will have a tax bill of $18,500.

I then run a div strip strategy that breaks even for the year + collects $5k in franking credits.

At tax time my bill for trading will be $13,500.

PS tax sucks, no wonder I have been focusing on longer term investing lately
Click to expand...
Here is an article on dividend stripping.

https://www.afr.com/personal-finance/shares/dividend-stripping-is-a-dangerous-dance-20150317-1m142v
 
I had a bit of fun with it for a while - switching back and forth with BEN & BOQ and they were sub 10's at the time. But the requirement to hold for 45+ days to get the franking credits made the whole deal a bit of a gamble so I went for greener pastures :)
 
PZ99 said:
I had a bit of fun with it for a while - switching back and forth with BEN & BOQ and they were sub 10's at the time. But the requirement to hold for 45+ days to get the franking credits made the whole deal a bit of a gamble so I went for greener pastures :)
Click to expand...

Yeah only looking at it as currently the 45 day rule wont apply as I am below the $5000 limit. Obvs still need a profitable strategy, I was thinking that it might be a little extra edge I have being small. Plus if it works I can also show my wife how to trade the same way
 
Here you go.

The reporting season may be over but in its wake is left the twice-a-year window of opportunity to try for extra gains by dividend stripping. It's not as painful as it sounds – all you have to do is buy a stock, pick up the dividend and sell it again later on. But in the real world things can go badly wrong.

Popular with active share investors and some fund managers, dividend stripping is essentially about picking up the dividend and, more often than not, swapping it for the capital loss which typically occurs because shares tend to fall on the ex-dividend date (the date after which the owner has no claim to distributions) by a corresponding amount.

The support that top 20 stocks paying regular, fully franked dividends often receive within rising markets means there's greater likelihood the capital loss will be smaller than the dividend gain.

But some stocks drop a lot more than the dividend, and then underperform ex-dividend, so be careful. The post-dividend fall tends to be more prominent for stocks paying a big one-off dividend. This can occur when there aren't enough natural buyers, and only the people who bought for the dividend are the same ones who exit again.


Examination of historical dividend and share price data by Dividends.com.au shows that dividend stripping of S&P/ASX200 index shares can provide a 6 per cent-plus edge over the index for a holding period of 46 days, assuming simple guidelines are followed.

Advertisement

Tim Wedd of Crystal Wealth Partners, says the success of dividend stripping comes down to knowing when to enter and planning when to exit.

He cites recent volatility around the BHP price as a classic example. The stock fell from a 2015 high of $34.12 on March 2 to $31.94 on March 10, only to fall another $1.58 on the March 11 ex-dividend date to $30.33 – which was greater than the 79¢ dividend and franking combined. Since then the share price has continued to lose ground.

Timing important
"It all depends on when you entered the stock," says Wedd. "BHP's journey from around $40 early in 2014 to under $27 in mid-January, shows how a good dividend strategy can come unstuck."


If all your lucky stars lie up, you could not only pick up the dividend and the imputation credit, but also bag a capital gain all in one glorious bundle. This rare climax occurs when investors buy shares several weeks before the ex-dividend date in the expectation that the share price will rally closer to this date as new investors pile on in – to capitalise on its dividend cash flow – only to sell after it goes ex-dividend.

On the ex-dividend date a share price is more likely to drop due to the impact of the lapsed entitlement. But gains, especially in a bull market, can eventuate when dividends are relatively small and the company is a star growth stock, such as digital advertising business REA Group, Domino's Pizza, Carsales.com and even Crown Resort.

Then there are quality companies with sound fundamentals and strong yields, such as telcos, utilities, healthcare stocks and especially banks, that are more likely to rally a month ahead of their result. Assuming the result is good, they may continue doing so when the stock goes ex-dividend.

Given the cash rate is, it's hardly surprising income investors are watching for any opportunities, including dividend stripping, to outperform the market.


Some examples from 2013 are ANZ Bank's entry price 46 days prior to its May 9 ex-dividend date of $28.55, and ex-dividend closing price of $30.59, hence delivering a 10.8 per cent dividend strip return (over 46 days) and a 5.9 per cent edge over the S&P/ASX200 Accumulation Index.

Dividend doozie
Another doozie was Macquarie Group, which had an entry price 46 days prior to its May 13 ex date of $37.15, and ex-dividend closing price of $45.48, delivering a 26.4 per cent dividend strip return (over 46 days), and a 5.4 per edge over the S&P/ASX200 Accumulation Index.

But before you even contemplate achieving classic dividend strips like those, you need to get your head around the 45-day rule. Imposed by the Australian Taxation Office, the 45-day rule is designed to stop savvy traders flagrantly dividend stripping by buying on the last cum-dividend date and selling on the first ex-dividend date to accumulate near risk-free franking credits.


But you only need to satisfy the 45-day holding rule if you're going to exceed $5000 in franking credits in the year. As a rule of thumb, Bluepoint Consulting director Tony Bates says the limit is likely to apply to a share portfolio of more than $150,000. Investors with portfolios smaller than that and who value income over capital gain may still wish sell straight away. "Remember, if you're a smaller punter, the 45-day rule won't apply and the franking credit is a 42 per cent extra benefit that you can effectively get within a couple of days," Bates says.

With the US Federal Reserve preparing to raise interest rates, the market risks of dividend stripping are higher than usual, Bates says. Then there's the elevated capital management risk that could see stocks struggle to hold their dividends. Generally speaking, Bates says the less reliable the stock is as a dividend payer, the less bankable a dividend strip strategy becomes.

"If you think the local market could fall 10 per cent in response to the US raising interest rates or something else, don't do it," Bates says. "But if not, and you're under the 45-day rule, why not go early?"

Early buying, perfect strip

While buying early can reward you with the perfect strip, Roger Montgomery of Montgomery Investment Management warns that it can easily turn into the classic nightmare. This can happen when you buy ahead of the 45-day rule on the strength of a favourable consensus forecast, only to see the stock fall ahead of results.

Adding further injury, when the result finally comes out it's a shocker and the dividend is cut. However, given that it's still a big dividend yield of, say, 14 per cent (fully franked), you hang in there for the ex-dividend date. Fuelling further carnage, the stock slides into the ex-dividend date. Once it goes ex its 10¢ dividend, the share price then opens down 14¢ – dividend plus franking – and by the time sellers beat you to the exit, it's fallen 20¢ and keeps trending south within an illiquid market.

Like it or not, the 45-day rule only compounds the difficulty of successfully determining whether a share price will fall more or less than the dividend. However, you can minimise the potential for anguish, adds Montgomery, by recognising: whether the company share price was already on a downward trajectory following any (earlier) profit warning before you bought in; if the stock only had a strong yield due to a falling share price, and; whether the pre-profit consensus dividend forecast was now out of date.

Given that investors really need to receive the benefit of franking credits to make the strategy work, Montgomery says dividend stripping is best suited to those in pension phase – who don't pay tax. But with the modest outlook for earnings likely to put greater pressure on yields, together with high unemployment and sharemarket volatility, plus underlying business investment weakness, he says market conditions are not ideal for a timely punt on dividend stripping. "It seems that the chase for yield has run its course, and disappointing news could negatively affect a whole sector," Montgomery says.

He reminds investors that the value investing principles they may have applied to uncover quality stocks are just as relevant when choosing stocks for a potential dividend strip. "You're much better off buying quality stocks on an upward trajectory, that are incidentally going ex-dividend, rather than being swayed by a hefty yield or consensus forecasts that may only disappoint."
 
sptrawler said:
Here you go.

The reporting season may be over but in its wake is left the twice-a-year window of opportunity to try for extra gains by dividend stripping. It's not as painful as it sounds – all you have to do is buy a stock, pick up the dividend and sell it again later on. But in the real world things can go badly wrong.

Popular with active share investors and some fund managers, dividend stripping is essentially about picking up the dividend and, more often than not, swapping it for the capital loss which typically occurs because shares tend to fall on the ex-dividend date (the date after which the owner has no claim to distributions) by a corresponding amount.

The support that top 20 stocks paying regular, fully franked dividends often receive within rising markets means there's greater likelihood the capital loss will be smaller than the dividend gain.

But some stocks drop a lot more than the dividend, and then underperform ex-dividend, so be careful. The post-dividend fall tends to be more prominent for stocks paying a big one-off dividend. This can occur when there aren't enough natural buyers, and only the people who bought for the dividend are the same ones who exit again.


Examination of historical dividend and share price data by Dividends.com.au shows that dividend stripping of S&P/ASX200 index shares can provide a 6 per cent-plus edge over the index for a holding period of 46 days, assuming simple guidelines are followed.

Advertisement

Tim Wedd of Crystal Wealth Partners, says the success of dividend stripping comes down to knowing when to enter and planning when to exit.

He cites recent volatility around the BHP price as a classic example. The stock fell from a 2015 high of $34.12 on March 2 to $31.94 on March 10, only to fall another $1.58 on the March 11 ex-dividend date to $30.33 – which was greater than the 79¢ dividend and franking combined. Since then the share price has continued to lose ground.

Timing important
"It all depends on when you entered the stock," says Wedd. "BHP's journey from around $40 early in 2014 to under $27 in mid-January, shows how a good dividend strategy can come unstuck."


If all your lucky stars lie up, you could not only pick up the dividend and the imputation credit, but also bag a capital gain all in one glorious bundle. This rare climax occurs when investors buy shares several weeks before the ex-dividend date in the expectation that the share price will rally closer to this date as new investors pile on in – to capitalise on its dividend cash flow – only to sell after it goes ex-dividend.

On the ex-dividend date a share price is more likely to drop due to the impact of the lapsed entitlement. But gains, especially in a bull market, can eventuate when dividends are relatively small and the company is a star growth stock, such as digital advertising business REA Group, Domino's Pizza, Carsales.com and even Crown Resort.

Then there are quality companies with sound fundamentals and strong yields, such as telcos, utilities, healthcare stocks and especially banks, that are more likely to rally a month ahead of their result. Assuming the result is good, they may continue doing so when the stock goes ex-dividend.

Given the cash rate is, it's hardly surprising income investors are watching for any opportunities, including dividend stripping, to outperform the market.


Some examples from 2013 are ANZ Bank's entry price 46 days prior to its May 9 ex-dividend date of $28.55, and ex-dividend closing price of $30.59, hence delivering a 10.8 per cent dividend strip return (over 46 days) and a 5.9 per cent edge over the S&P/ASX200 Accumulation Index.

Dividend doozie
Another doozie was Macquarie Group, which had an entry price 46 days prior to its May 13 ex date of $37.15, and ex-dividend closing price of $45.48, delivering a 26.4 per cent dividend strip return (over 46 days), and a 5.4 per edge over the S&P/ASX200 Accumulation Index.

But before you even contemplate achieving classic dividend strips like those, you need to get your head around the 45-day rule. Imposed by the Australian Taxation Office, the 45-day rule is designed to stop savvy traders flagrantly dividend stripping by buying on the last cum-dividend date and selling on the first ex-dividend date to accumulate near risk-free franking credits.


But you only need to satisfy the 45-day holding rule if you're going to exceed $5000 in franking credits in the year. As a rule of thumb, Bluepoint Consulting director Tony Bates says the limit is likely to apply to a share portfolio of more than $150,000. Investors with portfolios smaller than that and who value income over capital gain may still wish sell straight away. "Remember, if you're a smaller punter, the 45-day rule won't apply and the franking credit is a 42 per cent extra benefit that you can effectively get within a couple of days," Bates says.

With the US Federal Reserve preparing to raise interest rates, the market risks of dividend stripping are higher than usual, Bates says. Then there's the elevated capital management risk that could see stocks struggle to hold their dividends. Generally speaking, Bates says the less reliable the stock is as a dividend payer, the less bankable a dividend strip strategy becomes.

"If you think the local market could fall 10 per cent in response to the US raising interest rates or something else, don't do it," Bates says. "But if not, and you're under the 45-day rule, why not go early?"

Early buying, perfect strip

While buying early can reward you with the perfect strip, Roger Montgomery of Montgomery Investment Management warns that it can easily turn into the classic nightmare. This can happen when you buy ahead of the 45-day rule on the strength of a favourable consensus forecast, only to see the stock fall ahead of results.

Adding further injury, when the result finally comes out it's a shocker and the dividend is cut. However, given that it's still a big dividend yield of, say, 14 per cent (fully franked), you hang in there for the ex-dividend date. Fuelling further carnage, the stock slides into the ex-dividend date. Once it goes ex its 10¢ dividend, the share price then opens down 14¢ – dividend plus franking – and by the time sellers beat you to the exit, it's fallen 20¢ and keeps trending south within an illiquid market.

Like it or not, the 45-day rule only compounds the difficulty of successfully determining whether a share price will fall more or less than the dividend. However, you can minimise the potential for anguish, adds Montgomery, by recognising: whether the company share price was already on a downward trajectory following any (earlier) profit warning before you bought in; if the stock only had a strong yield due to a falling share price, and; whether the pre-profit consensus dividend forecast was now out of date.

Given that investors really need to receive the benefit of franking credits to make the strategy work, Montgomery says dividend stripping is best suited to those in pension phase – who don't pay tax. But with the modest outlook for earnings likely to put greater pressure on yields, together with high unemployment and sharemarket volatility, plus underlying business investment weakness, he says market conditions are not ideal for a timely punt on dividend stripping. "It seems that the chase for yield has run its course, and disappointing news could negatively affect a whole sector," Montgomery says.

He reminds investors that the value investing principles they may have applied to uncover quality stocks are just as relevant when choosing stocks for a potential dividend strip. "You're much better off buying quality stocks on an upward trajectory, that are incidentally going ex-dividend, rather than being swayed by a hefty yield or consensus forecasts that may only disappoint."
Click to expand...

Cheers for that, I think it is worth investigating with my smaller account as I can take a reasonable hit and still break even at the end of the year.
 
Has anyone done dividend stripping with any of the Big 4 banks recently?

I'm curious to know if the capital loss was less than the dividend.
 
Sharkman said:
it's also a bit tricky to do a like vs like comparison because i generally don't do covered calls in isolation - i'll sell puts to take delivery of something before it goes ex-div, strip the div plus the franking credits (and i probably have an advantage over the fund there, as i trade thru a corporate trust and distribute the divs to low tax bracket beneficiaries who then claim most or all of those franking credits back) and only then sell covered calls to try and get rid of the stock after stripping the div.
Click to expand...

This has got me interested again. Thanks Sharkman!!!

The Chartist has a dividend momentum strategy that I got years ago as part of some package.

Using a strategy with an edge, collecting options premium and not having to hold for 45days......how can I lose ;)
 

Similar threads

ducati916
August 2025 DDD
2 3
Replies
54
Views
7K
ducati916
ducati916
ducati916
April 2025 DDD
2 3
Replies
53
Views
10K
ducati916
ducati916
ducati916
July 2025 DDD
2 3
Replies
45
Views
7K
ducati916
ducati916
Knobby22
Canada the Brave
2 3
Replies
55
Views
6K
mullokintyre
mullokintyre
basilio
How to totally xuck the worlds largest economy with a chainsaw
Replies
14
Views
2K
basilio
basilio
Top