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Dividend Stripping

What is dividend stripping?

Dividend stripping is where an investor buys a share prior and close to its ex-dividend date, holds the position through the ex-dividend date (this is the date that the shares should drop in value by the dividend amount) and sells the shares at their buy price or better soon after. This might be hours, days or even weeks but the aim is to hold the position over a short period of time.

The end result is that the investor will be entitled to receive the dividend, then sell the shares at or above the price paid at some point in the future. The cost of the transaction is fairly minimal depending on your dealing charges and how the investment is made. (You will need to factor in 0.5% in stamp duty plus PTM levy tax of £1.00 for transactions over £10,000).

This strategy allows the investor the opportunity do this trade multiple times throughout the calendar year on other dividend paying stocks. The main risk is that the share price might not recover to the desired level or even fall significantly. Although with careful research of the shares that have a tendency to suit this trading strategy, will help to minimise mistakes. But remember the golden rule that past performance may not be indicative of future results.

Firstly let’s look at a real example of a dividend stripping trade from 2019.

The company is Aviva which is a FTSE 100 listed insurance firm. On the 10th April 2019 the closing price of the shares was 431.1p. The ex-dividend date was 11th April and dividend amount was 20.75p which is 4.8% yield for this one payment.

On the ex-dividend date the shares opened at 411.4p, which was a drop of almost the entire dividend amount. However, by the 17th April, only 6 trading days later the share price was back up to 431.1p. The trade can illustrated on the chart below.

Let’s look at how this works:

  1. On 10/04/2019 you buy 5,000 shares as close as you can to 16:30 (the closing price on that was 431.1p, we will use this as the buy price), trade value £21,555. Once you have purchased the shares you qualify to receive the 20.75p dividend per share which is £1,037.50 for 5,000 shares. The yield on this single transaction is 4.8%.

  2. When the shares started trading on the ex-dividend date the share price opened down by the value of the dividend.

  3. On the 17th April the shares rise to the purchase price and you sell the shares at your buy price of 431.1p.

You might think that this was a lucky trade and that the market rallied during these 6 days, however the FTSE100 index only moved up by a maximum of 61 points during this time, which is only 0.8%.

Research and back testing your strategy

To research how a share price reacts in and around their ex-dividend date, you will need to have a trading platform with a good charting package that will allow you to see the price of shares at a particular time. The easiest way to do this is by using a candlestick chart. The candlestick will show you the open/high/low and close price (see below image) during the time period of your candle, in this instance a daily time period will suffice.

You will also need a good website to gather the data of when shares go ex-dividend. You only need the ex-div date but many websites will give you the dividend payment dates plus details of the yield and the history of the company’s dividends. Here is an example of one such site. Click here.

Remember that there are two critical dates for dividends, ex-div and div payment dates. The ex-dividend date is the most important date for this trade. The dividend payment date is simply the date that shareholders actually receive the cash payment. You will need to determine the share price at the close before the ex-div date, then study how long it takes for the share price to recover to your buy price.

If you trade using a CFD or spread betting account you will need to factor in additional charges for holding the position, although you will not pay stamp duty on the purchase.

Top 20 FTSE 100 yielding shares.

This is based on the current share price and the total dividends declared in the previous 12 month period. In general, the dividend declaration date is used as the cut off date.

Red Yield - Dividend Cut. Indicates the company has made a dividend cut to the most recent dividend or has stated that the next dividend will be cut.

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