Dividend Stripping

What is it?

Dividend stripping is the process of buying a stock and selling it after it goes ex-dividend. The objective is to capture the dividend with the objective that the dividend (plus franking credits) exceed the losses incurred in holding the stock. Of course the stock makes a profit that is a bonus!

Example

On 19 Dec 2011 I buy 1,000 TLS @ $3.23. Total cost $2,230 + brokerage.

On 13 Feb 2012 the stock goes ex a 14c dividend.

On the same day I sell my stock @$3.23. I’ve broken even on the stock, collected a dividend of $140 and collected $60 of franking credits which will reduce my tax when I lodge my return (note to get the franking credits I’ve had to meet the ATO’s 45 day rule … google for details). I’ve ignored costs in the is example. Note a breakeven is not guaranteed (YMMV).

Easy!

In the good old (pre-GFC) days, dividend stripping was easy …. a rising market meant that the stock could be often be sold for about breakeven, leaving the dividend as pure profit! Given that some larger stocks can yield up to 10%pa including franking), this meant an easy profit of about 5% in 45 days (or 40% annually) with minimal risk!

What about now?

Unfortunately dividend stripping in general no longer works particularly well … it was a definitely a strategy for a bull market. A reasonably analogue is flipping residential property … most of the profits come from the rising market rather than the renovation itself. There are a couple of reasons why its stopped working but the most obvious that in a secular bear market (i.e. the current market), most of the return (actual and expected) is from the dividend. This applies particularly to high yielding stocks. In plain English, this means a lot of people are pretty stoked to get a total return of say 10-13% and gains above this level are arbitraged away.

My next post will look at how to trade for profit around dividends in the new environment.

Ed

PS None of the above is financial advice. Consult a professional before investing or speculating.

Investing in gold and silver

Recently there has been a fair bit of publicity from Warren Buffet, Charlie Munger, Bill Gates and others as to whether gold was a worthy investment. They all answered in the negative. However this misses the point. Gold is not an investment. Its savings – an alternative to cash. Its not designed to be productive. Its designed to maintain its value regardless of the political or monetary conditions of the time. It is thus a kind of insurance. No you can’t eat it, but you can generally exchange it for food or other items of value!

How to invest in gold

A couple of alternatives.

  1. Buy bullion (e.g. Perth Mint, ABC Bullion amongst others). Store it with them or at another location.
  2. Invest in a security listed on the ASX that tracks the price of gold (e.g. GOLD or PMGOLD).
  3. Invest in a company which mines gold (e.g. Newcrest Mining).

It is worth pointing out that the price of gold mining companies does not necessarily track the price of gold and is subject to all the exploration, operational, fiscal and political risks of  running a mining company.

What about silver?

Silver is sometimes called “poor man’s gold” since it is of much lower value (about 55 times less at time of writing).

Silver is likely to maintain its value in all situations, however historically it has not been as stable as gold.

Aristotle defined money has needing to have several qualities – durable, portable, divisible and consistent. Gold in my opinion has all these qualities. Silver has most of them – I would not currently regard it as portable. If I sold my home I could easily transport its weight in gold. Silver – not so easy.

So, silver is currently less like “money” than gold. In certain situations it may become more “moneylike”. If its low risk savings and / or insurance you’re after, gold is the better choice in my opinion.

More later!

Ed

Note: Nothing in this post should be construed as investment advice. Consult a professional before investing in any security mentioned.

ASX Macro View Week Ending 17 Feb

Chart below shows the S&P/ASX 200 (black) relative to the S&P 500 (blue).

Clearly the Aussie market is underperforming significantly, a topic dealt with here: http://macro-man.blogspot.com.au/2012/02/2012-non-predictions-equities.html

I’m tipping this underperformance to continue … obviously credit conditions are relatively tight here vs everywhere else which is positively awash with liquidity (add Japan to this list). Our key sectors have little growth – financials sufffering from weak credit growth while resources facing the double whammy of a strong currency and cost pressures.

In addition I believe the high AUD makes the market a good relative short. And I suspect long only investors with global mandates do not see buying the market with the Aussie at 1.07 as attractive.

So fairly sangiune for now. Would like to be more enthusiastic!