Dividend Stripping

With banks paying so little in interest, many retail speculators are turning to the decent dividends paid from regular payers such as Vodafone, the big pharmaceutical companies and utility companies.

For individual companies in particular, it might not be so far-fetched to predict growth rates. Some of the finest companies in the UK have a revenue, earnings and dividend growth record which stretches over several decades. Some companies have a history of consistent operating margins and high return on shareholder equity, in bull and bear markets. So you can often calculate expected returns quite accurately for the long term.

Most buy and hold or value investors are looking in harvesting dividend yield – but how does that work with financial spread betting? In fact, it is quite simple. If you have a long spread bet position on ex-dividend day, you get an amount equivalent to the dividend because the shares fall. On the other hand, if you have a short position, you will have to pay a fee when the share drop due to the dividend payout.

FTSE 100 and other blue chip stocks like utility companies often have a tendency to give out big dividends and this can lead to a trading strategy commonly known as dividend stripping. With dividend stripping traders go long on some of the high-yielding shares just before the ex-dividend date. Spread bets pay out immediately on ex-dividend day unlike shares where a payment can be delayed for week. So if a spread trader thought that the shares were likely to recover by more than the value of the dividend payment (since stocks will typically drop by the dividend amount on ex-dividend day), he would open a long rolling spread bet and then it is just a waiting game to see if the shares recover to a point where costs are covered.

In bullish periods this strategy can work but in the current turbulent markets we are experiencing the reverse might equally be as effective (but of course you would then have to expect the stock to fall in excess of the dividend payment).

Here’s another strategy (not related to dividend stripping and applies to shares trading as well) for dividend shares:

I identify a share by looking at the historical dividend, and then look at the forecast dividend for the next 2 years (hoping it looks secure). If it looks like it will continue to offer a consistent or rising dividend and I understand the company I then buy in gradually over a period of time looking for any dips using basic graphs and 40/200 day EMA. I use spreadsheets and alerts to notify buy points. I try and limit each holding to approximately 20k, so effectively slow down buying at that point and start monitoring. Above that level I tend to swing trade trying to make some capital gains whilst keeping a dividend on the 20k base holding.