Dividend Yield Play - Instalments - Portfolio Study background and rules
- The scenario
- What type of investor will this strategy suit?
- Expected results of the study
- Which stocks will be selected?
- How we run the portfolios
- Selection criteria for shares and instalments
- What happens to the uninvested capital and dividends received?
- What if the share price falls?
- Brokerage charges
- Tax implications
On January 2009, we set up two mock portfolios and compare their performance over the 2009 calendar year. Each portfolio started with $20,000.
The objective of the portfolio study is to compare the returns achieved from a share portfolio versus an instalment portfolio over a period of 2 years with the use of the dividend yield play strategy. The aim of the strategy is to generate a regular income stream over the period by investing capital between dividends, holding the underlying for a period of 45 days and then selling the shares after the ex-dividend date, before rolling the capital into the next dividend cycle.
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
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.
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.
* Additional Shares may be added to the above list depending on announcement dates and whether the dividends are fully franked.
There are two portfolios:
- Portfolio 1 - Trading for dividends using shares
- Portfolio 2 - Trading for dividends using instalments
Each portfolio will have an initial $20,000 available from 1 January 2009. Every month, the portfolios will take the following steps:
- Select companies from the above list which announce a profit result and payment of a dividend
- The companies will be filtered in the order that profit announcements are made
- Purchases will be made into the first four companies from the list that announce their dividends and then rolled into the next available company once the 45 day period is covered.
- The size of each trade is $5,000 per portfolio
- A limit of four shares or instalments can be purchased at one time
- Purchase date - The shares and instalments will be purchased at the closing price (at 4:12pm 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 closing price (at 4:12pm EST), entitling each portfolio to franking credits. The total holding period is 45 days plus two days for acquisition and disposal.
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
- Vanilla instalments will not roll during the trading period (45 day rule)
- Self funding instalments are exempt – This is because unlike ordinary instalments the dividends received are used to reduce the loan amount.
- If there are more than one warrant which satisfy the above criteria, the warrants will be chosen alphabetically by issuer on a rotational basis.
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.
Since we want to compare the results of the dividend yield play strategy and whether the instalment portfolio outperforms the share portfolio there will be no stop loss implemented in this strategy.
No brokerage will be charged.
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.