How to invest in ASX dividend stocks, plus the dividend stripping strategy

FY25 half-year earnings season is upon us (FY24 full-year reporting season for some companies!), which means it's time to begin getting your investing house in order. We’re gearing up for earnings season at Market Index and over the next few weeks, we’ll be releasing several articles to help you with:

• When companies are about to report
• What the market is expecting of them when they do
• Dividend amounts and ex-dividend dates

We’re going to kick off our earnings season coverage with dividends. Wait a minute – nobody’s declared a dividend for this earnings season yet – so there aren’t any ex-dividend dates…I hear you say!

Correct. But I assure you, this is indeed the perfect time to start thinking about the deluge of dividends about to be paid in March and April, particularly for those who wish to investigate the dividend stripping strategy.

Dividend stripping is a long-time favourite of Aussie income investors who, like great white sharks, roam the ASX dividend ocean on the hunt for big, fat, juicy dividends. But (do a Sir David Attenborough voice in your head here…) the ASX dividend investor is not only interested in finding those juicy dividends, they want the lucrative franking credits that come with them as well.

Get a grip on the strip

Dividend stripping involves buying shares in a company prior to the ex-dividend date and selling those shares after the ex-dividend date. The goal is to capture the dividend and any associated franking credits. In some cases, the share price in question may not fall as much as the dividend-franking credit combination, yielding an instant profit.

Some investors choose to hold until they’ve recouped all the share price fall that comes after a company goes ex-dividend and try to make the entire dividend-franking credit profit. Once the trade is complete, dividend strippers move on to the next, and next dividend stripping opportunity.

Before we get into the next bit, which is essential information for ASX dividend strippers, I’d better just cover a few definitions for beginners (to save you googling elsewhere!).

• Dividend = A portion of a company’s profit its management may choose to distribute to shareholders. Most major ASX-listed companies pay dividends twice a year, based upon their half and full year reporting schedule.

• Declaration date = When the company declares the dividend, generally when the company reports its earnings, will include the amount of the dividend, the degree to which the dividend is franked (e.g., 0% (unfranked), 50%, 80%, 100% etc.), and important other dates like the ones below.

• Ex-dividend date = On this day, the shares trade without entitlement to receive the dividend. Anyone who purchased shares prior to the ex-dividend date is entitled to receive the dividend, whereas anyone who purchases shares on or after the ex-dividend date is not entitled to receive the dividend.

• Record date = Usually occurs the next business day after the ex-dividend date, administrative only, the company paying the dividend will pay the dividend to those recorded on their share register on this date. Rest assured, if you purchased your shares prior to the ex-dividend date, you will be on the register.

• Payment date = When dividend moneys are disbursed to registered shareholders. This usually occurs a few weeks after the ex-dividend date, and it could take a couple of weeks extra for the money to finally hit your bank account.

• Franking Tax Offset (“Franking Credit”) = System to prevent double taxation on dividends paid to Australian investors. When a company pays corporate tax on its profits, it can attach franking credits (representing that tax paid) to the dividends it distributes. Shareholders then use these credits to offset their own tax liabilities, effectively receiving credit for the tax already paid at the company level. If the franking credits exceed the shareholder’s tax bill, the excess may be refunded.

The fly in the dividend stripping ointment: The 45-Day Rule

Based on that last definition, franking credits are potentially extremely lucrative to those on low or zero marginal tax rates, like pension-phase superannuation funds – essentially making them as valuable as the dividend itself.

There are some extra rules, though, and it’s best to check these with your financial services professional, but consider how franking credits work for an investor on a zero marginal tax rate: