For the past 5 years I have been stripping the dividend from instalment warrants quite successfully for my mum who is a pensioner and my two children who earn their own money. Come dividend time I search for just the right ones and can calculate to the dollar how much my profit will be. Unless I can guarantee my pofit I dont risk the trade. Its the franking credit which gives me the profit. Anyway I am just trying to understand who wins and loses from my trading these. Obviously I am a winner but what of the issuer and the company paying the dividend? Eg . . WESIOQ - Wesfarmers was paying a Dividend of $1.40 and a Franking Credit of .60c so my trade would receive $2.00 back. I bought the warrant for $1.50 on the day before ex-dividend. The next day I sold it for .07c after the stock went ex-div. 2666 warrants were purchased. My outlay inc. brok was $4018. received divs of $3732 and franking credits of $1599 and sold warrants at .07c - $166 (inc brok). Profit is $1479. So I win. However does the issuer win and the company paying the dividend?. I held this trade overnight - if I didn't trade would the company have retained my dividend and not have had to pay it out. Can anyone explain this from the issuer viewpoint and the company viewpoint. Thankyou.
Stripping Dividends from Instalment Warrants
- Thread starter chreen
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Sorry but you are both right and wrong about the 45 day rule and I quote from ATO You and Your Shares Booklet. " . . .the holding period rule requires that you hold shares for at least 45 days to be eligible for franking credits. However, this rule does NOT apply if your total franking credit entitlement is below $5000 which is roughly equivalent to receiving a fully franked dividend of $11,666 . . " So I always ensure the franking credits received are below $5000 p.a.
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I love that trade, seems like the perfect arb.
The company will pay the div regardless of whether you or the issuer hold the warrants.
The franking credits would accrue to the issuer if they held the shares for 45+days. The fc's would be lost to all if a large trader owned the warrants at ex_div date and did not hold for 45+ days (but like you say small trades have an exemption.
From the cost of the instalment warrant of $1.50 I guess it was well out of the money, and priced purely for the dividend (excl the franking credit).
Being out of the money, it would have a very low delta.
The ato has a shadowy requirement that you need to maintain material exposure to the share price, at least a delta of 0.3 . Your warrant may not have met this criteria and therefore not qualify for the franking credit. But your Mum would be extremely unlucky to get caught!
The company will pay the div regardless of whether you or the issuer hold the warrants.
The franking credits would accrue to the issuer if they held the shares for 45+days. The fc's would be lost to all if a large trader owned the warrants at ex_div date and did not hold for 45+ days (but like you say small trades have an exemption.
From the cost of the instalment warrant of $1.50 I guess it was well out of the money, and priced purely for the dividend (excl the franking credit).
Being out of the money, it would have a very low delta.
The ato has a shadowy requirement that you need to maintain material exposure to the share price, at least a delta of 0.3 . Your warrant may not have met this criteria and therefore not qualify for the franking credit. But your Mum would be extremely unlucky to get caught!
Here again the "at risk" rule does not apply if franking credits are below $5000 p.a.. As for the previous post saying that you can only obtain a small amount from this strategy well I trade for 2 kids plus a pensioner. They receive about $800-$2000 per trade in profit p.a. So that is $2400-$6000 p.a. times 5 years is $12000 - $30,000. I think thats fine for a trade held overnight.
An another benefit of this, for the children, is that over the years you accumulate a fairly large amount of capital losses. This could be useful many years later when they grow older and make capital gains and would otherwise have to pay tax.
Chreen - In your example, it worked quite well because the warrant cost so little so there was absolutely no risk. In reality, can you easily find instalment warrants which are so far out of the money/near expiry that the cost of the warrant is actually less than the div+FCs? I thought instalment warrants were usually fairly deep in the money.
Hyperion
Chreen - In your example, it worked quite well because the warrant cost so little so there was absolutely no risk. In reality, can you easily find instalment warrants which are so far out of the money/near expiry that the cost of the warrant is actually less than the div+FCs? I thought instalment warrants were usually fairly deep in the money.
Hyperion
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As far as I can tell, when it comes to dividend stripping, the loser is the taxman as he is refunding to you (in the form of franking credits) the money that the company had paid to him in tax.
Just wanting to clarify a couple of questions.
1. Why not choose an installment Warrant that is further out of the money?
In the example above - something below $1.40? Not sure what ABN AMRO call them but Macquarie have their HOT Installment Warrants that from memory are geared to 95%.
2. To take advantage of the 47 day (including trading days) franking rule, and to enable a greater trading volume, why not keep these warrants for the full 47 days? They are after all, already worth close to 0.
I've had some exposure to installment warrants and use the gearing to buy and hold blue chips, but to be honest, dividend stripping seems too simple.
While it will not always be possible to purchase these installments at a price which is below dividends payable, and in theory I believe dividend yield should be factored in, making these warrants more expensive then they are. Looking over my warrants price history, there are very frequent examples of this mispricing. Which is, as pointed out by another member here, essentially an arbitrage opportunity.
Very interested in further discussions on this topic.
Thanks.
Revision to the above. Obviously franking credits go out the door despite holding for more than 45 days when leverage is greater that 70%.
