Dividend yield play portfolio study - Explanation & rules

The ‘Dividend Yield Play' (DYP)  is a popular strategy with many investors. Companies pay dividends at different times during the year, providing an opportunity to buy and sell the shares, and collect the dividend as income. Doing this on a regular basis may generate a recurring income stream.   (see table below – 'Ex-Dividend Schedule')

Using instalments rather than shares, investors can potentially enhance their income stream given the same capital investment (e.g. $10,000). 

On July 1, we set up two mock portfolios and compare their performance over the 2004/05 financial year.  Each portfolio started with $100,000. The monthly results will be available on our website and in the monthly ASX Traders Update.  Subscribe to this free monthly newsletter on the MyASX homepage. 

Objectives of the study

The objective of the portfolio study is to compare the returns of using instalments versus shares when actively implementing the Dividend yield play (DYP) strategy. The aim of the DYP is to generate a regular dividend income stream throughout the year by buying shares and instalments prior to the ex-dividend date and then selling those shares and instalments some time later (trading period is 45 days in our study). This process is then repeated by reinvesting the capital into the next dividend opportunity.

 What type of investors will this strategy suit? 

This strategy aims to actively manage an investment portfolio and requires monitoring on a regular basis. Due to the leveraged nature of instalments, this strategy may suit investors with a moderate risk profile.  

Expected results of this study?

Our expectation is that the instalment portfolio will outperform the share portfolio during periods where the share price remains neutral (or rising) during the specified trading period.  Conversely, we expect the instalment portfolio to underperform when the share price falls strongly after the ex-dividend date.

Which stocks will be selected?

The selected shares are expected to go ex-dividend in the months listed below. They are expected to pay fully franked dividends and there are a range of instalments available over each share.

Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
AWC ASX CML ANZ NAB        ALN AMP ANZ MBL
CBA AMP BHP MBL SGB ASX BIL NAB
TAH ALN WBC AWC FGL SGB
WES BIL BHP PBL WBC
FGL CBA PMN
PBL QAN SUN
PMN TAH
QAN TLS
SUN WES
TLS WOW
WOW CML

How we run the portfolios

There are two portfolios:
Portfolio 1 - Trading for dividends using shares
Portfolio 2 - Trading for dividends using instalments

Each portfolio will have an initial $100,000 available from 1 July 2004.  Every month, the portfolios will take the following steps: 

  • Select companies from the above list who announce a profit result and payment of a dividend
  • The companies will be filtered in the order that profit announcements are made
  • Ensure that these companies meet the criteria set below 
  • The size of each trade is $10,000 per portfolio (plus brokerage)

Purchase date
The shares and instalments will be purchased at the offer price (at 3.55pm EST) two trading days after the company announcement of the dividend payment.

Sell date
The shares and instalments will be sold after 45 days at the bid price (at 3.55pm EST), entitling each portfolio to franking credits.  The total holding period is 45 days plus two days for acquisition and disposal.

Selection criteria for shares and instalments

Portfolio 1 will select shares based on the following criteria:

  • After two trading days following the company’s profit announcement, the share price must NOT have fallen by more than 5% of the closing price on the trading day prior to the announcement.
  • Dividends are fully franked. 

Portfolio 2 will select instalments based on the following criteria:  

  • Instalments are regular geared (i.e. < 65% loan-to-value ratio)
  • Greater than 3 months and less than 12 months to expiry
  • Rolling instalments will not reset during the trading period (45 day rule)
  • Self funding instalments are exempt
  • If there are more than one warrant which satisfy the above criteria, the warrant with the greatest gearing ratio will be chosen. 

What happens to the univested capital and dividends received?

All dividends and remaining cash will be placed in a cash management account.  For simplicity, we assume no interest will be accrued on these amounts.

What if the share price falls?

A stop loss will be placed in the market for shares and instalments traded.  This is to manage the capital loss of the portfolio given underperformance in the share price.

The shares (and instalments) will be liquidated at the closing price of that day where the closing price of the share falls by more than 5% compared to the purchase price of the share during the investment period. The stop loss level will be adjusted down on the ex dividend date by the dividend amount.

Brokerage charges

A brokerage rate of $40 per trade will be factored into each transaction.

Tax implications

All trading positions will be liquidated within a 12-month timeframe.  As a result, each portfolio is ineligible for the 12-month capital gains tax concession.

Both portfolios are eligible for franking credits, as the shares and instalments will be held for a period of 45 days plus two days (franking credit ‘45 day’ rule). View the 'Taxation treatment of warrants' prepared by Ernst & Young.


Disclaimer
The information is for educational purposes only and does not constitute financial product advice. ASX does not represent or warrant that the information is complete or accurate. You should consider obtaining independent advice before making any financial decisions. To the extent permitted by law, no responsibility for any loss arising in any way (including by way of negligence) from anyone acting or refraining from acting as a result of this material is accepted by ASX.