Stripping the Dividend
Dividend stripping has been around ever since the shares have been traded, but with the advent of leveraged products on equities, it has come to make a whole lot more sense.
The principle of dividend stripping is based on the way the share price fluctuates when the company is about to declare a dividend. On the day a company goes ex-dividend a company’s share price usually falls as the cash to pay the dividend leaves the balance sheet bound for investors’ pockets. In theory, this should ‘all come out in the wash’ as the shares should fall back by the amount paid out in dividend. But this doesn’t always happen – stocks with good momentum often don’t fall by the full amount.
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What this means is that you can buy the shares before the dividend is declared, wait for the dividend announcement and consequent drop in price, then sell the shares, collect the dividend, and make a small profit. This is a tactic that has been used by stock traders, even though the gains are usually not large. It requires a large amount of capital to control a good number of shares and make a worthwhile profit.
However, if you use spread betting or contracts for difference to trade in the shares, you have to put up far less money for the number of shares involved. This makes dividend stripping much more viable and worthwhile. Provided the stock does not go back down more than the amount of the dividend, the marginal amount is multiplied by using a derivative. Although the amount the share price stays above the breakeven point may be only half percent of the share price, by using a leveraged product such as spread betting, with perhaps 10% margin, you can realize 5% on the trade within a few days.
To use this, you must be sure that you understand the particular dates applying to the dividend. The ex dividend date is the first day on which the share buyer does not qualify for the dividend, so you need to buy the shares or place the spread bet on the day before, or earlier. The record date is usually two days after the ex dividend date, and the payment date is the day when the dividend funds are actually paid out to the shareholders. With CFDs you receive the dividend equivalent right away.
This isn’t the only way that you can trade around dividend time. Often the shares will increase in value during the few weeks before the ex dividend date, and some traders choose to go long earlier in order to benefit from the capital appreciation. In fact, although not dividend stripping as such, some traders will take their profit from this price action before the dividend is declared. Others will benefit from this capital appreciation and also expect to make money from conventional dividend stripping. As with ordinary dividend stripping, using spread betting to control these shares provides much better leverage of your funds.
You may hear of dividend stripping being used in other ways. For the share trader, it’s a way to establish a capital loss on the shares, and taxation of dividends may be dealt with in a different and advantageous way depending on the trader’s tax position. Dividend stripping is also used by companies, because there is a tax advantage to them when they receive the dividends. This arises because the government seeks to reduce double taxation, that is being taxed on the dividends they receive and taxed again on the dividends they pay out from those receipts.
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