Share

No longer really profitable

THE PRICE performance of British American Tobacco and Remgro on Monday, 16 August, when both these shares were ex-dividend, unfortunately shows that even this kind of farming is no longer what it was. Our current very alert Receiver of Revenue doesn’t like this kind of farming either. He will penalise you heavily if you’re caught.

But let’s begin at the beginning. Many listed companies pay dividends. Some of them twice a year, an interim and a final dividend, and others pay only a final dividend. It’s actually these shares, which pay only one dividend a year, sometimes 5% or perhaps even more of the ruling share price, that offer the best opportunity for dividend farming.

Dividend farming can be very quick, like two business days, or sometimes slightly longer, usually about six weeks. And then there’s the 13-month approach, which I rather like myself.

For novices: understand how dates work around dividends. Take Remgro for the past two months. On 24 June, when it issued its financial results, the company declared a final dividend of 125c/share payable on 23 August. To ensure that the right shareholders receive the dividend, the company stipulated that all those who held shares at the close of business at the JSE on Friday, 13 August, would receive the dividend. In other words: that would be the last day of trading before the books closed.

The very short-term dividend farmer would therefore buy a good lot of shares on Friday, 13 August. In the case of Remgro, the price was 9885c/share. An investor who bought Remgro shares on Monday, 16 August, would no longer qualify for the final dividend of 125c. In a normal market environment, Remgro’s share price would of course fall by the 125c dividend between Friday and Monday.

That’s in a normal market. Sometimes, if things are going well on the markets, especially in those times when the gold price happily soared $30 or more in a day, the share price would not fall between the cum (the Friday) and the ex (Monday) days – and then the dividend farmer would be smiling broadly.

However, even if the price falls by the full 125c, there’s still a bit of profit in it for the dividend farmer. If he sells the shares at the lower price on the Monday, the following Monday the dividend will be in his bank.

So where’s the profit you may be wondering? The dealer created a trading loss, one that will be useful for him to write off against other fully taxable trading profits and at the same time earn a non-taxable dividend income. The speculator converts part of his taxable trading profit into a non-taxable dividend income. So now you know why the Receiver watches dividend farmers so carefully.

But last week things didn’t go well for the dividend farmers. Remgro’s share price fell by 239c between Friday and Monday, and for that the speculator only received a 125c dividend. British American Tobacco, which was 378c/share ex dividend, was also disappointing, and the share price fell by 400c between Friday and Monday. A bad day for short-term dividend farmers.

When you’re a 13-month dividend farmer, it’s often not even necessary, or desirable, to sell the share. Nor can the Receiver have any objection to these 13-month farmers who subsequently become long-term investors. Any investor could buy Lewis shares in June for about 6100c, the same as the current price. By then, the investor would’ve known that he was going to receive a final dividend of 179c/share from the company at the end of July. And even if the company only keeps up its current dividend distributions, there’s a further gift of 144c for the investor at the end of January 2011, as well as at least another 179c/share in July 2011. For the 13 months from June 2010 and July 2011, the farmer gets a nice fat 502c/share, perhaps even more. Lewis indicated just last week that business is stabilising well. Do the calculation yourself; 502c over 13 months on a share bought for 6100c. My calculator tells me that’s a nice tax-free dividend yield of 7,6%/year. That’s good enough to justify a small withdrawal against the home loan.

That’s not bad dividend farming at all. You may perhaps decide in July of next year, after you have received the third dividend, that it’s now time to move out of Lewis to, for example, Billiton. The capital gain on the Lewis shares that you held for less than three years is, of course, taxable. But if you’re in this kind of business, you have no objection to paying the tax – especially if the interest on the loan, specifically made so as to buy the Lewis shares, can perhaps be deducted from the trading profit. The dividends are dividends and are safe in the bank.


Vic de Klerk has shares in Remgro and Lewis
We live in a world where facts and fiction get blurred
Who we choose to trust can have a profound impact on our lives. Join thousands of devoted South Africans who look to News24 to bring them news they can trust every day. As we celebrate 25 years, become a News24 subscriber as we strive to keep you informed, inspired and empowered.
Join News24 today
heading
description
username
Show Comments ()
Rand - Dollar
19.00
-0.5%
Rand - Pound
24.02
-0.5%
Rand - Euro
20.51
-0.2%
Rand - Aus dollar
12.35
-0.0%
Rand - Yen
0.13
-0.6%
Platinum
900.15
+0.4%
Palladium
1,000.00
-0.2%
Gold
2,210.45
+0.7%
Silver
24.60
-0.2%
Brent Crude
86.09
-0.2%
Top 40
68,142
+0.7%
All Share
74,329
+0.6%
Resource 10
56,957
+2.3%
Industrial 25
103,635
+0.4%
Financial 15
16,485
-0.2%
All JSE data delayed by at least 15 minutes Iress logo
Company Snapshot
Editorial feedback and complaints

Contact the public editor with feedback for our journalists, complaints, queries or suggestions about articles on News24.

LEARN MORE
Government tenders

Find public sector tender opportunities in South Africa here.

Government tenders
This portal provides access to information on all tenders made by all public sector organisations in all spheres of government.
Browse tenders