R U Into Dividend Stripping? If U R…then here’s how to use the Lincoln System to make it work quickly and efficiently

Disclaimer. The normal disclaimer applies Warning. This newsletter is provided for your entertainment only, I’m not a financial adviser, I have not taken account of your objectives, financial situation or needs. You should therefore consider the appropriateness of any descriptions of my Newsletter and it’s newsletter portfolio in light of your objectives, financial situation and needs, before taking any actions. All views and information expressed in this newsletter are not the views of Lincoln and or its directors, agents, representatives and employees. I do invest and trade in shares, I’ll mark the ones that I own with (**)

What is dividend stripping. Here’s how Wikipedia defines dividend stripping. Dividend stripping is the purchase of shares just before a dividend is paid, and the sale of those shares after that payment, i.e. when they go ex-dividend. On the day the company trades ex-dividend, theoretically the share price drops by the amount of the dividend. However, quality companies, such as the Australian banking sector, historically recover the value of the dividend within a matter of weeks, at which time they can be sold at a potential profit.sharesdividendex-dividend This may be done either by an ordinary investor as an investment strategy, or by a company's owners or associates as a tax avoidance strategy.investmenttax avoidance

And what about franking credits? (again this is sourced from Wikipedia) In Australia, ordinary external investors are free to buy shares cum-dividend and sell them ex-dividend, and treat the dividend income and capital loss the same as for any other investment. But schemes involving a deliberate arrangement by a company's owners to avoid tax are addressed by anti-avoidance provisions of Part IVA the Income Tax Assessment Act 1936.Australiaex-dividendcapital lossPart IVAIncome Tax Assessment Act 1936 Investors Dividend stripping by investors has the general advantages or disadvantages described above, but in addition in Australia there are franking credits attached to dividends under the dividend imputation system. Those credits can only be used by eligible investors (see the dividend imputation article), so there's a tension between different investors for the amount shares should fall when going ex-dividend. A rationally priced drop for one group is a bonus or trading opportunity for the other.Australiadividendsdividend imputation rationally priced But the difference is not large. In a franked dividend, each $0.70 cash has $0.30 of franking attached (at the 30% company tax rate for 2005). To eligible investors it's worth $1.00, to others it's worth only $0.70 (of before-tax income in both cases). A typical half- yearly dividend (in 2005) of 2% of the share price would mean an extra 0.85% in franking credits, an amount which might easily be swamped by brokerage and the general risks noted above. Tax avoidance The kind of dividend stripping tax avoidance schemes described above presently fall under anti-avoidance provisions of the Income Tax Assessment Act part IVA amendments introduced in 1981.tax avoidance Part IVA is a set of general anti-avoidance measures addressing schemes with a dominant purpose of creating a tax benefit. Section 177E specifically covers dividend stripping. That section exists to avoid any difficulty that might arise from identifying exactly where a tax benefit arises in dividend stripping. Dividend stripping will generally result in money to owners being taxed as dividends, irrespective of interposed steps. In other words…you should be aware that there are issues with dividend stripping…do your own research and take tax advice before attempting this strategy…I am not a tax advisor and you cannot rely on this information without further advice

OK…so you want to try some dividend stripping. My Notes from the Lincoln User Group Meeting 2013 (I think) indicate that there is a consistent advantage to buying quality dividend paying stocks. I believe that the stocks should be bought in the window of 80 to 30 days before the stock goes ex dividend. (I didn’t take good enough notes to confirm the exact time period or the amount of advantage provided). Whatever the case…the rule we’re going to be applying here is described as follows. Find good stocks that are paying a decent dividend. Identify dividends that are more than 30 days and less than 80 days from going ex dividend. Check if the market likes those stocks and produce a short list for buying.

Step 1. filter for good stocks paying a decent dividend (use the Lincoln Filter Tool) As you can see this filter selects only strong stocks of a reasonable size that are paying dividends over 3.5%. It took me about 30 seconds to create and run it

Filter results. Save to watchlist

Now view the upcoming dividend watchlist in the charting tool….this one looks good

And this one looks terrible

Quick summary Why you’d do this Expose your capital to the market for only a short period and capture the benefits of franked dividends. What to do. Use the Lincoln system to identify targets for investment in just a few minutes How to start. Learn to use the stock filter and charting tools and practice. What if you could do this. You can run the filter say once a month to look for possible targets. If you are into dividend stripping this will help you efficiently identify targets for investment. You’d need less than 3 hours per month to run this strategy.

Happy investing.