What is dividend stripping?
Dividend stripping is a short-term trading strategy. It’s when you buy a stock shortly before a dividend has been declared with the intention of selling it immediately after the dividend is paid.
Where have you heard about dividend stripping?
This practice is typically employed to gain tax advantages, although some countries have closed the loophole in their tax system that allowed people to do this. In many nations, securities must be held for at least 3 months before investors can sell them at a loss and claim it on their taxes.
What you need to know about dividend stripping.
When the stock is bought, it’s usually risen in value because of the anticipation surrounding the dividend payout. By the time it’s sold, it’s generally lost value.
Dividend stripping requires a large amount of capital to make it worthwhile, which is why it’s usually only practiced by institutional investors. They have the capacity to buy huge volumes of securities and can offset the risks. If one stock doesn't do well, this can be cancelled out by another more successful stock.
Find out more about dividend stripping.
Read our definition of dividend tax for more insight into dividend payments.