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Dividend Stripping – a strategy to make money?

Dividend Stripping – a strategy to make money?

Dividend stripping involves buying a stock before it goes ex dividend and selling it after. The idea is to pick up the dividend, swapping it for the capital loss (which occurs because the shares usually fall ex dividend by the amount of the dividend). You also get the franking credit, and if the market is strong, you may not get a capital loss at all. If you do get a capital loss, there are tax benefits there too.

Many stocks, particularly the big ones, rally (rise) well in advance of the ex dividend date, so don’t buy the day before. There are also large gains when interest rates are low and when the market is strong, so there is an element of predictability under these conditions.

A warning to eager dividend strippers: If you are going to make more than $5000 in franking credits (equivalent to 5% on $100,000) in the same tax year, you need to appreciate the 45 day rule. In such circumstances you need to own the shares for 45 days, excluding the buy and sell date, to qualify for the franking credits and you can’t hedge away the stock exposure with futures, options or CFD’s.

Usually shares drop by the size of the dividend on the ex dividend date. Because they don’t drop by the dividend and the franking credit’s value, you ‘earn’ the franking credits. International investors, who generally stick to the very large companies, don’t get the benefit of the franking credits so if all goes to plan, they may sell in advance ahead of the dividend (as locals who do receive the franking support the shares) and buy back after the ex dividend date, providing support for the local dividend seller to sell into.

By Roger Montgomery, 17 October 2009

This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.

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2 Comments

  1. Dear Roger,

    I am fully “subscribing” to your investment philosophy and in fact after listening to one of your presentations I became a value investor as well. I have read a lot about great value investors such as Ben Graham, Warren Buffett, Walter Schloss, Philip Fisher, Joel Greenblatt and many others. I have spent a lot of time researching their value investing approaches but as always there is a room for improvement.

    I am very pleased that you have setup this blog and if you do not mind I have a question which I would greatly appreciate if you could answer. As you know all great value investors, including the first two names mentioned above, used arbitrage situations to increase values of their portfolios. I was wondering if you cloud identify some arbitrage opportunities that small value investors like me could exploit? In fact are there any on the market? Maybe dividend striping is one of them but what about other opportunities?

    Many thanks in advance.
    Kind regards

    Irek Baran
    Value Investor

    • rogermontgomeryinsights
      :

      Hi Irek,

      Thanks for your email and your encouraging words. Make sure you buy Monday’s Financial Review. In it you will find a column, amongst the share tables that lists all the announced takeovers. This is were you can find ‘post-announcement’ arbitrage opportunities. There are many others but Monday’s ‘Fin’ should get you started on your research.

      All the best, Roger

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