DEAR FRIENDS AND SENIORS,
TODAY I WOULD LIKE TO FAMILIARISE YOU WITH A TERM 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.
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.
USES
For an investor dividend stripping provides dividend income, and a capital loss when the shares fall in value (in normal circumstances) on going ex-dividend. This may be profitable if the income is greater than the loss, or if the tax treatment of the two gives an advantage.
Different tax circumstances of different investors is a factor. A tax advantage available to everyone would be expected to show up in the ex-dividend price fall. But an advantage available only to a limited set of investors might not.
In any case the amount of profit on such a transaction is usually small, meaning that it may not be worthwhile after brokerage fees, the risk of holding shares overnight, the market spread, or possible slippage if the market lacks liquidity.
TAX AVOIDANCE
Dividend stripping as a tax avoidance scheme works to distribute a company's profits to its owners as a capital sum, instead of a dividend. The purpose is generally that capital gains may be subject to less tax.
As a basic example, consider a company called ProfCo wishing to distribute RsX, with the help of a stripper called StripperCo.
- 1. StripperCo buys ProfCo shares from their present owners forX+Y.
- 2. ProfCo pays a dividend ofX to StripperCo.
- 3. StripperCo sells its shares back to the owners for $Y.
The net effect for the owners is anX capital gain. The net effect for StripperCo is nothing, the dividend it receives is income, and its loss on the share trading is a deduction. StripperCo might need to be in the business of share trading to get such a deduction (i.e. treating shares as merchandise instead of capital assets).
Many variations are possible:
- StripperCo might buy different "class B" shares in ProfCo for just the $X amount, not the whole of ProfCo.
- Such class B shares could have their rights changed by ProfCo, rendering them worthless, instead of StripperCo selling them back.
- ProfCo might lend money to StripperCo for the transaction, instead of the latter needing bridging finance.
The tax treatment for each party in an exercise like this will vary from country to country. The operation may well be caught at some point by tax laws, and/or provide no benefit.
https://www.moneycontrol.com/stock-charts/smartlinknetworksystems/charts/SNS01
This link is a valid example of dividend stripping
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