Dividend Yield Strategy

Submitted by Share Trading on 30 August, 2010 - 16:04

The Dividend Yield strategy, of the Dividend Yield Play or Dividend stripping, is a well known strategy which investors and traders take advantage of from time to time.

The dividend yield strategy is simply this: buy the stock before the exdividend. Hold it until the ex-dividend date. Sell the stock. Rinse and repeat to receive the dividend and the franking credits. (However, you may need to hold the shares for at least 45 days to be eligible to receive franking credits. This rule doesn’t apply if your total franking credit entitlement is less than $5,000 in one year.

Dividend Yield Case Study

Consider the variables of this dividend strategy: to exit profitably, an optimum case study would be that you bought the stock at a low price a few weeks before the dividend. The stock price rises during the weeks leading to the date. At ex dividend, the stock price falls, but not below your entry price. You receive the dividend and exit by selling your shares profitably as it the stock price didn’t fall under your entry.

A catastrophic example is if you entered into the trade at a certain price. And because of company, sharemarket or economic circumstances, the share price falls on the weeks or days leading to the exdiv date. The stock price falls further on ex dividend. Although you've received the cheque for the dividend and the credits, you are far more out of pocket if you exit. Depending on your trading plan, you may wish to cut your losses and exit your position anyway at a loss; or if you wish to stick it out and wait for a stock recovery, your dividend yield play can possibly turn into a long term investment.

Maximise Your Dividend Yield

To maximise your dividend yield, instead of using stocks, you may wish to use a derivative which is traded on the Australian stock market: an instalment warrant. Be warned that this is a leveraged financial instrument and it carries both benefits and risks.

The dividend yield strategy isn't fool proof, it works sometimes and from time to time. Always consider the company and the company's future plans and prospects. Be wary of the risks of the dividend yield play and talk to your financial advisor and do some research. Learn about dividend dates .

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