Forum Archive Index - June 2000

["Oliver Shapleski" <oliver.shapleski@vuw.ac.nz>]

Michael,

 

Dividend stripping for small investors is potentially profitable when the dividend is taxed at different rates in the hands of different investors. 

 

All other things being equal, a perosn being taxed at 20% on income will have a greater preference for dividends than a person taxed at 39%.  The net dividend will be higher for the person being taxed a lesser amount.  The person on a lower tax rate has a comparative advantage. 

 

Now, if you follow my logic on the value of a company cum and ex dividend (before and after the div payment date is reached), and accept the statistical analysis that says that the price of shares will drop by an amount of (the dividend less 25%), there is an opportunity for arbitrage. 

 

Let's consider a $1 share that pays a div of 10c.  Statistics suggest that the ex-div price will be 92.5 cents (1.00 - (.75).10)

Shareholders will then hold a dividend of 10cents gross dividend, and a 92.5 c share. 

 

The drop in price assumes that the average tax rate is 25%, so that the investor holds a 7.5c net dividend and a 92.5c share, or $1 in total value. 

 

Now if the investor is a student (like me) and is taxed at 20%, that investor will have a net dividend of 8 cents and a 92.5 c share, or $1.005 in total value. 

 

As I understand it, dividend stripping for the small investor is a description of this type of systematic dividend chasing behaviour.  Like Tony said, not profitable in a bear market. 

 

Dividend stripping by majority shareholders is a completely different kettle of fish - more on that tomorrow when I finish an essay or two.  Hope I've explained it ok - anyone who wants to add anything to the theory feel free.  (Note: I don't necessarily subscribe to the theory)

 

Oli

 

 

 

 

----- Original Message -----

From: Michael Gore

To: sharechat@sharechat.co.nz

Sent: Tuesday, June 06, 2000 10:45 AM

Subject: [sharechat] Dividend Stripping

Hi!  I've been reading the messages from Jeremy and Oliver and I was wondering if someone could explain dividend stripping for the benefit of newbies like me.  I understand that this is buying shares in a company immediately before a dividend payout and then selling immediately after in the hope that the share price drops by less than the dividend paid out but this is all I know.  Can anyone enlighten me further?  For example how often does it actually work that the dividend is greater than the share price drop?  regards  michael