A brief explanation of dividend stripping: how exactly does it work?
Dividend stripping is an easy way for some shareholders to gain extra profit. The novice investor may want to avoid it. Below is an explanation of how it works.
Dividend stripping: how does this phenomenon work?
Before we can properly explain how dividend stripping works, it is first important to deviate from the standard process of paying out dividends . It is crucial that you separate two types of data from each other. This is the date on which a share goes through life as ex-dividend and the exact record date of the share , which is the day on which you are officially established as a share owner.
The value of a share decreases with the exact amount of dividend on the ex-dividend date. The record date is also important in this process: this date indicates which investors are allocated which share. The tricky thing about these dates is that the stock exchange to which the share is linked has quite a lot of influence, because this determines which date a specific share becomes ex-dividend. The record date plays an important role in this. In many cases, the ex-dividend date occurs approximately 1 to 3 days before the record date.
Companies that pay dividends only a few times a year prefer to look closely at the record date before selling or buying their shares .
Dividend stripping in practice
Dividend stripping is actually quite simple. As a shareholder, you purchase a share before it goes ex-dividend, which means that this still takes place in the CD period (cum dividend). This period means that if you invest during this time, you can also claim the future dividend of the company. If the share in question is then sold ex-dividend, you sell your own investment portfolio and can benefit from the dividend.
Dividend stripping is actually not very beneficial. Share prices are quite volatile, because the prices are accompanied by the ex-dividend. In real life, this does not always go smoothly, it can also go very differently.
Stock prices do not always have to match the theory. The price can also suddenly turn 360 degrees and the opposite of what is expected.
Dividend stripping seems at first glance an ideal way to gain extra profit. Keep in mind that it is not all roses and moonshine, there are also risks involved. The value of a share can suddenly plummet while you have the share in your wallet. The loss can be greater than the profit you made with a share.
Is dividend stripping beneficial?
Dividend stripping is very beneficial for many shareholders. But, of course, there are always things you have to take into account.
Furthermore, there are always double transaction costs. You buy a share with a view to profit. You then have to sell your share again quite quickly. That is of course not very nice, but sometimes there are also currency costs, something that many people do not take into account. With foreign currencies, there is of course always a currency risk .
Dividend stripping is absolutely not a passive strategy, like the buy-and-hold strategy we all know.
Day trading sometimes manifests itself in dividend stripping, and therefore it is an active strategy. If you are interested in dividend stripping, it is always advisable to check the history of the company, focusing on the profit outlook.
Illegal business
Dividend stripping is not always completely clean. There is also an illegal variant of dividend stripping. This is used to evade tax. In these cases, the dividend tax is reclaimed without permission. This is also called the cum-ex deal.
Such a cum-ex deal involves three parties. Transactions are then made around the ex-dividend date. This makes it unclear which party can be awarded the dividend. After all, only one party is actually entitled to claim the dividend tax refund.
Conclusion
Dividend stripping is a fairly quick way to make some extra profit. It is crucial that you as a shareholder check the status of the company you are going to buy the share of. There is a chance that you will not make any profit, as the prices will plummet when the dividend is paid out. A passive investor cannot also profit from dividend stripping, as this is an active strategy.
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