View Full Version : Dividens

18-04-2011, 08:25 PM
Hi, maybe a stupid question but whats stopping someone buying share before the dividend date, receiving dividend then selling them after? Do they have some minimum holding period or something?

18-04-2011, 08:46 PM
Hi, maybe a stupid question but whats stopping someone buying share before the dividend date, receiving dividend then selling them after? Do they have some minimum holding period or something?

Not a stupid question and nothing stopping one from doing that - people do - but there's no guarantee the trade will work to your advantage. Share prices generally drop by roughly the dividend amount once the share trades x-dividend, so allowing for brokerage you're unlikely to make much, if anything, on the exercise.

18-04-2011, 08:48 PM
they have an ex.date(the date which you must be holding to recieve divie) which is usually a good weeks before payment date..
what your talking about is called "Dividend stripping" prefectly legal buy days before ex.date sell after ex. date reap divie but 90% of the time the share price will drop by the divie amount the next day after ex.date

18-04-2011, 08:51 PM
Hi, maybe a stupid question but whats stopping someone buying share before the dividend date, receiving dividend then selling them after? Do they have some minimum holding period or something?

No.You can buy up until they go ex dividend.Say they go ex div 5pm thursday you can buy up until then and get the divie.You can then sell next morning when they are ex divie.
I say that, but you would need to tell your broker what you are doing.

19-04-2011, 07:28 AM
I try it sometimes. You can get caught out as the price usually drops when it goes ex-div but in a bouyant market the price can recover quickly (couple of weeks). If the market goes against you, you should get three dividend payments in little over 12months which usually provides a good yield and allows plenty of time for the share price to recover if the market goes against you. That said some really high dividend paying shares can be a trap if there is a reason the share price is tanking.
Mind you don't take my advice as I usually buy on a wim or emotion with very little understanding of the company and its prospects. Latest example would be Spark Infrastructure 5% div in March nearly back at the buy price but exchange rate going against me. I'm hoping that if the market goes bad a utility company is seen as a safe haven. (although a rise in interest rates which could take off at any stage would probably bring the price down.) or a 15% yield over 13months.
The other downside from my perspective is to get a significant dividend you have to buy a significant amount of shares so it can end up being pretty risky considering the amount you have tied up in one company. NZ shares are better as they have imputation credits attached and no exchange risk.
Here is a question for the accountants, if you are buying for the dividends, if you sell at a slight capital gain sometimes, would you be a trader if you are only after the dividend (income) and any capital gain is a bonus.

19-04-2011, 09:55 AM
Aaron - I think it would be classed as a 'profit making scheme' so you have to claim the gains and the losses.

It also works from the other side. If you dont want dividend income (ie. cant utilise IC's) you could sell before ex date and buy in staight after. This definately happens overseas with agreed repurchase prices offered from the banks that provide the service.

04-05-2011, 07:26 PM
"Here is a question for the accountants, if you are buying for the dividends, if you sell at a slight capital gain sometimes, would you be a trader if you are only after the dividend (income) and any capital gain is a bonus."

There are two situations (generally) where a casual investor will pay tax on 'capital' gains. I discount the third situation, where you are in the business of dealing in shares, as it is unlikely for casual investors to be in that situation. You are taxed upon the profit made (the sale price is income, the cost of the share a deduction) if your dominant purpose when acquiring the share was to dispose of it. I think it is implied in the legislation that it is a purpose of disposing for it at a profit.

If your purpose in buying the share was to enjoy the dividend income, then following the statute you will not be taxed on the proceeds of disposal. There are two points that catch people out regarding this provision. The first is that they often think it only applies to traders, which is wrong as it is anyone who buys a share with the sole purpose of selling it. The second point is that people assume the IRD will never be able to prove their intention. This is a dangerous assumption because the onus is on you to prove to the IRD you did not buy the shares for the purposes of selling them.

It all gets a bit difficult at that point. The reality is that the IRD is only likely to raise an issue when you have bought and sold reasonably large parcels and disposed of them fairly quickly (and of course made a gain on the way). Where you are buying them before they go ex. div. and selling them soon after then it is especially complicated. However, in my view it is not taxable, as predominantly you were buying to get the dividend. In fact, you would in most cases have a tax loss if you applied the relevant section:

You buy a share for $10.00 with a $1.00 dividend. After the ex dividend date, you sell the share for $9.50. Your position would be as follows:

Sale of share 9.50
Dividend 1.00
Cost of share 10.00
Taxable Income 0.50

Total Return (33% tax rate)= 0.34 (3.4%)

If you did not have to pay tax on the gain then you would not have the $9.50 income and the $10.00 expense, thus your taxable income would be $1.00.

Total Return (33% tax rate)= $0.67 dividend after tax - $0.50 loss in value
= 1.7%

The second situation, as the other poster mentioned, is where there is a profit making scheme in place. I am not sure about the above activity constituting a profit making scheme. The section of the Act which covers profit making schemes dates back to when land was dealt with under the same provisions as personal property. Most of the cases have indicated that a scheme is really something much more physical, involving a series of interelated steps, and numerous contracts that are all linked by a main plan. There have been one or two Australian cases that have found a profit making scheme in regards to share dealings, but they all involved complicated facts and quite extensive financing arrangements.

Sorry to go on so much, but as you can see it is not a straight forward area when it comes to proving the intentions of taxpayers. If you are trading relatively small amounts then it may not be worth the IRD's while getting expensive tax experts to investigate whether you had the requisite purpose when buying the shares. It is something to bear in mind however, always make sure you have one other reason for buying the shares.

Hope this helps.

05-05-2011, 06:03 AM
How would this apply to TA where the TA'er has every intention of selling once a trend reversal takes place. I.e. even at the time when they bought the shares they knew they intended to sell them as soon as a sell signal fires?this sounds like you are buying for capital gain only therefore gains taxable.

Even if you have dividends in there somewhere, the primary purposes sounds like buy into an uptrend, and sell at the signal.

Contrast that with someone who buys for dividend income but plans to sell when 1. the dividends yeild drops (ie the share price rises out of step with div yeild) or fundimentals have changed such that capital may be lost. This may be the case even if the capital that may be lost is a capital gain (ie. you buy a stock that has risen significantly but there is uncertainty and the price may fall)

An example of this is buying FBU. It has seen a significant capital gain since the chch quake. you might see they are now overvalued and decide to sell to avoid the risk of a capital loss. Contrast this to someone who bought into an uptrend and sells now that a signal has fired.

The buy and sell points may be at exactly the same times but the intention was different, hence the tax treatment.

05-05-2011, 08:08 PM
To clarify this. You are taxed on the disposal of shares if your DOMINANT purpose at the time of buying them was to dispose of them. The ONLY purpose considered for the purposes of this provision (CB 4, Income Tax act 2007) is the dominant one at the time of acqusition. If your intention changes then this is irrelevant. For example, I bought some shares in Vector last year at ~$2. At the time they offered a good dividend yield, and as the market was a bit shaky I wanted to invest in a reliable utility. This week I sold out when the price passed $2.55, because I felt that it was not in my interests to keep holding it. I am not taxed on the disposal because I never intended to buy for a capital gain.

The leading case on this is quite useful because the judge made three key concessions. It is accepted (and the IRD has confirmed this) that people buy shares for three main reasons (other than buying for the sole purpose of selling):
(i) For dividend income
(ii) Because they like the company/other extraneous reasons
(iii) For general investment purposes, that is, a mix of dividend income and capital appreciation

If you are a trader who buys solely to sell at a gain then you will be assessed on profits made from this. If you make a loss then it works out as a deduction in your favour. However, much of it comes down to what you can prove to the IRD. It is all well and good saying you did/did not have a particular intention, but proving it is another matter. If you have a pattern of similar trades then you are certainly on the back foot when it comes to arguing you bought the shares for dividends.

CJ has this spot on in much fewer words. I just find it a very interesting topic to talk about.

06-05-2011, 05:20 AM
Any written statement that you can point to will be useful in proving your case. Especially so if this is relayed to a third party, such as a broker or lender. I have heard of forum evidence being used in a criiminal trial, so I do not see why you could not point to it to support your case.

Although, it often happens in cases that the courts (should it get that far) take the view that "words of the taxpayer are inherently unreliable" and consequently "actions speak louder than words". This means that they will look at things such as the length of time the share was held for, what features it showed (i.e. was it a speculative stock by nature), and similar transactions.

I have often thought that it would be a good idea to be able to register your intention with the IRD. This would make a good insurance policy when buying shares as it would take (say you are a high income earner) 33% off your gains and 33% off your losses.

02-08-2011, 08:37 AM
In regard to upcoming dividends. I usually get this from the Monday Herald.
Where else can you get this information.
ASB Securities has upcoming dividends but this doesn't seem very comprehensive for NZ property trusts/companies. For example the herald had Argosy's latest dividend but I don't see it on the ASB securities site unless I go to the actual company announcements.
NZX has upcoming dividends but only dividends going ex in the next few days and its pretty pointless finding out three days before it goes ex dividend.
I haven't spent much time on this but would appreciate any ideas from anyone who looks to buy a share prior to it going ex-dividend where they get this information particularly in regard to NZ property companies.