Benefit from strong dividends: It’s worth it "Dividend hopping"?

• Focus on dividends
• Ex-day must be observed
• Taxation in view

Dividends as an entry argument

For many investors, paying a dividend can be a reason to buy a company’s stock. There are some listed companies that are known for their constant distribution of dividends. So-called dividend aristocrats who have continuously increased their dividends for at least 25 years include Coca-Cola, Eli Lilly and McDonald’s.

Keep an eye on dividend payments

In Germany, investors are generally entitled to receive a dividend if they own shares in the company on the day of the general meeting at which this is decided. The first trading day after the general meeting is called the ex-day, as “CAPinside” explained. If investors only join the company on this day, they are no longer entitled to the declared dividends. However, it usually takes at least a few days before the dividend is actually paid out. The share is then traded ex-dividend, i.e. with the dividend amount deducted. Visually the paper is then under pressure.

Things are a little different in the USA, CAPinside continues. The company’s board of directors sets a “record date” for dividend eligibility. All shareholders who held shares in the company on that day are then entitled to receive the dividend, which is usually paid out a few days after the record date. In this case, the ex-date is the last business day before the record date.

Quick money through “dividend hopping”?

However, for some investors, exposure to a publicly traded company that pays dividends is not enough, as the dividend hopping trading strategy shows. This involves buying shares before the ex-date and then selling them in order to collect the payment.

First, investors who want to do dividend hopping should look at the relevant dividend stocks. Shortly before the general meeting, the shares actually go into the depot. You should then wait for the dividend to be credited before parting with the shares again.

Doubts about strategy

But is the dividend strategy worth it? According to CAPinside, the approach has some pitfalls, as it is ultimately a reallocation of stocks into cash holdings. A major disadvantage is that investors involved receive the dividend payment, but this is deducted from the price on the ex-dividend trading day. As a rule, there is no actual advantage, as “BNF” also wrote. If you exclude daily price gains and losses during the holding period, dividend hoppers come out to approximately zero.

Depending on the broker, there are also transaction costs for purchases and sales. Investors should therefore think carefully about whether this strategy could actually be lucrative for them.

Focus on taxes

The strategy also becomes particularly explosive when taxation is taken into account, as “Manager Magazin” explained. In Germany, dividend payments are affected by capital gains tax, which is 25 percent. Church tax may also be added. Capital gains are then only taxed at the time of sale. According to CAPinside, these different timings could have noticeable consequences, especially for larger portfolios. Additional bureaucratic effort arises when taxing dividend payments from foreign companies.

Alternative strategies

According to Manager Magazin, it could be more worthwhile for dividend hoppers to buy the shares shortly after the dividend payment and to hold them until the ratio between the price and the expected dividend is at a profitable level.

BNF recommends a long-term dividend strategy rather than dividend hopping. Investors focus on shares of companies that pay strong dividends and hold them over a longer period of time. Instead of short-term profits, investors primarily focus on long-term and regular payouts.

Dividend ETFs

If you don’t want to collect high-dividend stocks yourself, you can also use a corresponding ETF, which does not reflect the price of an index, but rather its performance. Dividends are already included in these ETFs, but this cushions any deductions. But caution is also required with these investment vehicles, as investor and publicist Christian W. Röhl explained to “Das Investment”. “Dividend yields say nothing about the quality of companies,” warned the expert. That’s why investors shouldn’t just blindly buy dividend stocks or be lured by dividend ETFs. “Even with ETFs, it’s not the packaging that counts, but the content. So take a look at what’s inside and whether it fits in with the rest of your portfolio.”

Fabian Bullinger, editorial team at finanzen.net

This text is for informational purposes only and does not constitute an investment recommendation. finanzen.net GmbH excludes any claims for recourse.

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