How To

How to master the fine art of ‘dividend stripping’

Thu 20 Jan 22, 3:52pm (AEST)

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Key Points

  • Successful dividend stripping comes down to knowing when to enter & exit
  • Don't forget the 45-day rule
  • Dividend strippers can be left high and dry when there are too few natural buyers

With reporting now upon us, there’s no better time to contemplate the opportunity for dividend stripping that comes around twice annually when companies reward shareholders with surplus cash during dividend season.

To the uninitiated, the art of dividend stripping - which involves buying a stock before it goes ex-dividend and selling it after - can be fiddly.

While it’s potentially dangerous if you get it wrong, those who get it right can receive a nice little earner for their efforts.

Contrary to popular opinion, there’s a lot more upside to dividend stripping than picking up the dividend and, in most cases, swapping it for the capital loss, which typically occurs due to shares falling ex-dividend by a corresponding amount.

Traps to look out for

Everything being equal, highly regarded blue-chip stocks paying regular (fully franked) dividends often receive sufficient support within rising markets to ensure the capital loss is actually smaller than the dividend gain – and this can be used to offset gains elsewhere.

However, be careful as some stocks can fall further than the dividend and then add insult to injury by underperforming ex-dividend, and this typically happens when stocks are paying big one-off dividends.

In this case, ‘would-be’ dividend strippers can be left high and dry when there are too few natural buyers, and those who bought for the dividend end up being the same people who exit again.

When to enter and exit

The success of dividend stripping comes down to knowing when to both enter and exit.

Historical dividend and share price data has previously revealed that dividend stripping of the S&P200 index can provide a high single-digit-plus edge (over the S&P200 index) for a holding period of 46 days - assuming simple guidelines (see 45-day rule) are followed.

Going for the trifecta

By timing dividend stripping to perfection, you stand to not only pick up the dividend, and the imputation credit, but also bag a capital gain too boot.

This dividend stripping trifecta occurs when you 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 (just like you) come on board - to capitalise on its dividend cash flow – only to sell after it goes ex-dividend.

It’s true; capital growth is more likely to be negative as a general rule due to the impact of the ex-dividend date entitlement.

However, it’s not uncommon to see gains - especially within a bull market - when dividends are relatively small, and the underlying company is a star growth stock.

Stellar performing growth stocks aside, quality companies with sound fundamentals and strong yield,, like telcos, utilities, healthcare stocks and especially banks also tend to rally a month ahead of their result; and assuming the result is good, they may continue doing so when the stock goes ex-dividend.

Understand the 45-day rule

Before embarking on executing the classic dividend strip, it’s important you get your head around what’s called the 45-day rule.

Imposed by the ATO, the 45-day rule (90 days for certain preference shares) 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.

However, you only need to satisfy the 45-day holding rule if you’re going to exceed $5000 in franking credits in the year.

If so, the shares must be held for 45 days between the buy and sell dates, and the position must maintain a minimum 30% delta.

In other words, you simply can’t hedge all of the stock specific risk away with options or other derivatives.

It would normally take a $150,000 share portfolio to put an investor within a bull's roar of exceeding $5000 in franking credits annually.

But remember, if you’re within this danger territory, couldn’t care less about franking credits and value income over capital gains, you’re at liberty to sell with your ears pinned back.

Key guidelines

  • Dividend stripping typically works best when there are low interest rates, and rising markets provide good underlying support for quality stocks on the ASX200 paying fully franked dividends.

  • But remember, the opposite is also true, and with the US Fed preparing to raise interest rates, the current market risks of dividend stripping could be higher than usual.

  • The less reliable the stock is as a dividend payer, the less bankable a dividend strip strategy becomes.

  • Buying early can reward you with the ‘perfect strip’, but it can easily turn into the classic nightmare 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.

  • The 45-day rule only compounds the difficulty of successfully determining whether a share price will fall more or less than the dividend.

To find out about stocks with upcoming dividends, click here.


Written By

Mark Story


Mark is an investigative financial journalist and editor who started his career working for Marathon Oil in London. He has a degree in politics/economics and a diploma in journalism. Mark has worked on 70-plus newspapers and financial publications across Australia, NZ, the US, and Asia including: The Australian Financial Review, Money Magazine, Australian Property Investor and Finance Asia. Mark is passionate about improving the financial literacy of all Australians through the highest quality content. Email Mark at [email protected].

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