Dividend Stripping

If you are an Australian resident for tax purposes then you are able to take advantage of a tax arrangement designed to avoid the 'double taxation' of company profits.

Companies pay tax on their profits and shareholders who receive the dividends must still pay income tax upon their receipts. To encourage domestic share ownership, the federal government introduced dividend imputation in 1987. Known as 'franking', this countered the issue of double taxation.

So how do you maximise the advantage that franking offers? “Dividend Stripping”

An investor can squeeze more profit out of dividend payments by choosing a portfolio of fully franked stocks that; are about to go ex-dividend, have a reasonable dividend yield and have historically re-couped their dividend drop-off in the share price soon after the dividend has been paid, thereby fully benefiting from the dividend, franking credits and the recovering share price.

Example

Zinifex (now part of Oxiana) went ex-dividend 12th October 2006. The Stock was paying a 100% fully-franked dividend of $0.70 per share. This is the good example to demonstrate the price action of a share going ex-dividend and what can actually happen. Below is the Zinifex chart from the 3rd of October, at around 1:40pm. The numbered points will be explained below.

• Point 1: The closing price of $13.08 on Friday 13th of this month.
• Point 2: The opening price of $12.60 of Zinifex on the day it went ex-dividend.
• Point 3: The price of $12.08 is the theoretical value on the day ZFX went ex-dividend. That is, $0.70 in dividend received and $0.30 in franking credits (tax paid by the company)
• Point 4: The price of $12.38 is the theoretical value of the shares going ex-dividend, without the investor being eligible for the franking credits.
• Point 5: Indicates the increase in volume.