What is Dividend Stripping?

Dividend stripping is a simple trick. You buy shares just before a company’s dividend payout, then sell them right after. The only goal is to get the dividend cash and create a fake loss. You use this loss to lower your taxes. This works because a stock’s price always drops by the dividend amount. Smart investors use this.

Understanding Dividend Stripping Strategy

Dividend Stripping Definition and Tax Benefits

Cum-Dividend Share Purchase Process

Your timing must be perfect. Buy shares within three months of the record date. For mutual funds, it is nine months. This is the law under Section 94(7). It is the only way to get the dividend. A “cum-dividend” stock means you get the payment. You must watch these dates.

Ex-Dividend Share Sale Mechanics

After the dividend payout, the stock price always drops by the same amount. This is a fact. Investors use this drop. They sell the stock at the lower price to create a fake loss. This loss cancels out other gains. An “ex-dividend” stock has no dividend attached. This is when dividend stripping happens.

Short-Term Trading and Capital Loss Creation

Tax-Free Dividend Income Strategy

Before 2020, dividend stripping was a perfect strategy. Dividends were tax-free. Now, everything has changed. You pay tax on dividends. This makes the trick useless for most stocks. It only works now for special investments like REITs and InvITs. Their dividends are still tax-free.

Capital Loss Offset Opportunities

The fake loss from dividend stripping cancels out other gains. This lowers your tax bill. But Section 94(7) is a strict rule. It stops you from using this loss if you sell too fast. This law stops people from cheating on taxes.

Market Timing for Dividend Capture

Record Date and Ex-Dividend Timing

The record date is the most important date. It decides who gets the dividend. You must buy before this date. The ex-dividend date is when the stock trades without the dividend. The price drops, and that’s the key moment for dividend stripping.

Share Price Adjustment Patterns

A stock’s price must drop by the dividend amount on the ex-dividend date. That is a market rule. Smart traders know this pattern.

How Does Dividend Stripping Work in Practice?

Step-by-Step Dividend Stripping Process

Share Purchase Before Declaration Date

Here is an example. ABC Limited stock is at ₹200. It announces a ₹10 dividend. You buy 1,000 shares for ₹2,00,000 before the record date. Now, you get ₹10,000 in dividends. You must buy shares within three months of the record date to follow the Section 94(7) rule.

Dividend Collection and Share Sale

After the dividend, the stock price drops to ₹190. You sell your shares for ₹1,90,000. You now have a ₹10,000 loss but keep the ₹10,000 dividend cash. With new tax rules, you must pay tax on that dividend. Section 94(7) also stops you from using the loss if you sold too fast.

Investment Strategy and Portfolio Impact

High-Yield Stock Selection Criteria

Successful dividend stripping requires picking companies with big, reliable dividends. Blue-chip stocks and utility companies are the best targets. You must check a company’s dividend history. High-yield stocks are the only way to get enough cash to make this strategy work.

Transaction Cost Considerations

You must think about costs. Broker fees and taxes destroy your profits. You must calculate if your dividend will be more than all your costs. For mutual funds, exit loads will also cost you money.

Risk Management in Dividend Stripping

Market Volatility and Price Risks

The market is risky. A stock’s price can fall much more than the dividend amount. This happens in a bad market. You will lose more money than you made from the dividend. Economic changes can make your losses even bigger.

Regulatory and Tax Compliance

You must follow Section 94(7). This law will cancel your fake loss if you sell too fast. Then the tax benefit is gone. The government is always watching. New rules could ban dividend stripping forever.

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