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Topping Up Cum or Ex Dividend

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moorfield
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Topping Up Cum or Ex Dividend

#399741

Postby moorfield » March 28th, 2021, 12:26 pm

Interested to know if anyone here has a strict preference on buying or topping up cum dividend? I think from now on I am going to be stricter on this and avoid ex dividend purchases, I want my cash to start generating income as as soon as possible. (*)

For example, it made some sense topping up GSK last month (I did) to lock in that final dividend next month, but I would now avoid doing so until after its corporate split is done next year. Similarly I bought MNG before next month's dividend.

My April top up list is currently DLG, DGOC, BATS and SSE in that order, however DLG and BATS are ruled out as ex dividend they will be next eligible again in June.




(*) Intended to be a practical rather than a dogmatic discussion - I have a private prediction on who is going to be the first to trot out "the time to buy is now" here... You will be named if I'm right ;)
Last edited by csearle on March 28th, 2021, 2:02 pm, edited 1 time in total.

csearle
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Re: Topping Up Cum or Ex Dividend

#399750

Postby csearle » March 28th, 2021, 12:41 pm

I used to pay attention to this earlier on in my HYP career, where there were multiple candidates, so I let the dividend dates make the final call. After a while though the candidates narrowed each top-up time and I got out of the habit.

I just received more BP dividend than I'd expected. Found that I'd entered the xd date a week too early in my spreadsheet and had bought some during that very week. A small bon bon of fate to cheer me up a tad.

Chris

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Re: Topping Up Cum or Ex Dividend

#399753

Postby moorfield » March 28th, 2021, 12:55 pm

Slight clarification: This is really a question for the ongoing building/maintenance of an HYP, so the title should perhaps be "Topping Up Cum or Ex Dividend". ie, it's understandable this would not be a strict criterion at the inception of an HYP at a particular point in time. That said, despite its "high yield" GSK for example might not be an automatic starting choice for an new HYP over the next 9 months or so.
Moderator Message:
Done. - Chris

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Re: Topping Up Cum or Ex Dividend

#399757

Postby fisher » March 28th, 2021, 1:12 pm

From a purely logical point of view the share price should drop on the ex-dividend date by the amount of the dividend. So, simplistically you shouldn't be any better or worse off buying cum or ex dividend. However, there is stamp duty to pay on the purchase which would actually make it very slightly more advantageous to buy ex dividend.

In practice the share price will also be subject to market movements which may make you better off going one way or the other. Also, the share price may not drop by the dividend amount on the ex div day, but then this would effectively be unpredictable market movements. If there was any way to predict how to be consistently better off buying cum or ex dividend it would have already been taken advantage of and "arbitraged out".

For me, the only thing that is definitely predictable is the extra stamp duty payable which would make me plump for buying ex dividend if I had to choose. In practice I take no notice of ex div dates when I choose to buy a share as the difference it makes is so small.

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Re: Topping Up Cum or Ex Dividend

#399760

Postby GrahamPlatt » March 28th, 2021, 1:19 pm

It is however well worth paying attention to ex-divi dates when it comes to selling. Nice to leave with the last divi in the pocket, yes, but I was speaking more particularly about those where you have a DRIP set up. And have forgotten about. Which is how I come to hold 58 shares in this, 29 in that...

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Re: Topping Up Cum or Ex Dividend

#399761

Postby kempiejon » March 28th, 2021, 1:25 pm

Everything else being equal (it rarely is) I think cum div is better value for money, you'll get more shares for the same cash as the share price falls by the div amount.
I get the psychological effect of thinking your money is working quicker if you see the income plop into your bank account quicker but those still adding new money and mopping up dividends will soon be paying stamp duty to invest those dividends again. As other said buy cum you'll buy a few more shares and save the duty on the dividend amount.

As csearle said it could be a tie breaker and as a new investor it gave me a warm feeling. It doesn't really influence me now but I do look at the amount of any upcoming large dividend amounts when I have additions in mind as I might wait for that dividend to be paid from a share I hold and delay a top up to include it. My buys are monthly using the Halifax regular investment dates but I swap and change my regular dates.

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Re: Topping Up Cum or Ex Dividend

#399770

Postby dealtn » March 28th, 2021, 1:43 pm

fisher wrote:From a purely logical point of view the share price should drop on the ex-dividend date by the amount of the dividend. So, simplistically you shouldn't be any better or worse off buying cum or ex dividend. However, there is stamp duty to pay on the purchase which would actually make it very slightly more advantageous to buy ex dividend.

In practice the share price will also be subject to market movements which may make you better off going one way or the other. Also, the share price may not drop by the dividend amount on the ex div day, but then this would effectively be unpredictable market movements. If there was any way to predict how to be consistently better off buying cum or ex dividend it would have already been taken advantage of and "arbitraged out".

For me, the only thing that is definitely predictable is the extra stamp duty payable which would make me plump for buying ex dividend if I had to choose. In practice I take no notice of ex div dates when I choose to buy a share as the difference it makes is so small.


What is definitely predictable about the extra stamp duty?

Stamp Duty Reserve Tax is usually at 0.5% of the transaction.

Consider you have £10,000 to invest in Company A that trades at £1.10 (cum div) that pays a 10p dividend. You can buy 9091 shares, and pay £50 SDRT. Or, possibly the next day, it goes to £1 (ex div) you buy 10,000 shares at £10 and the SDRT is the same £50.

If you are only looking at this considering the same number of shares, then it is not just SDRT that is different, but your investment size too (and it is this difference driving the SDRT difference - nothing to do with the dividend, yield, cum div, ex div, or anything else).

The ex-div or cum-div difference (ignoring market fluctuations which are nothing to do with the dividend payment) is only about the timing of the cashflows associated with share ownership. Many seem to like the "obvious" benefit of earlier income (it is an income strategy after all), and then use that "income" to reinvest (sooner) in new shares etc. A similar way of purchasing those new shares arises by buying ex-div, and buying more shares at the outset, since the ex-div price dropping creates this opportunity.

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Re: Topping Up Cum or Ex Dividend

#399774

Postby dealtn » March 28th, 2021, 1:45 pm

kempiejon wrote:Everything else being equal (it rarely is) I think cum div is better value for money, you'll get more shares for the same cash as the share price falls by the div amount.
I get the psychological effect of thinking your money is working quicker if you see the income plop into your bank account quicker but those still adding new money and mopping up dividends will soon be paying stamp duty to invest those dividends again. As other said buy cum you'll buy a few more shares and save the duty on the dividend amount.

As csearle said it could be a tie breaker and as a new investor it gave me a warm feeling. It doesn't really influence me now but I do look at the amount of any upcoming large dividend amounts when I have additions in mind as I might wait for that dividend to be paid from a share I hold and delay a top up to include it. My buys are monthly using the Halifax regular investment dates but I swap and change my regular dates.


You buy more shares with your money ex div, not cum div!

If you could buy more shares with your money, and get a dividend, I doubt anyone would be asking the question as to which would be better!

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Re: Topping Up Cum or Ex Dividend

#399778

Postby Alaric » March 28th, 2021, 1:52 pm

dealtn wrote:Consider you have £10,000 to invest in Company A that trades at £1.10 (cum div) that pays a 10p dividend. You can buy 9091 shares, and pay £50 SDRT. Or, possibly the next day, it goes to £1 (ex div) you buy 10,000 shares at £10 and the SDRT is the same £50.


The point is that if dividends are being reinvested then that dividend received is also going to incur stamp duty. So there's an extra £ 909.10 to invest which will itself incur SDRT when invested.

Without reinvesting In the longer term you get more future dividends by buying ex as you would have 10000 shares instead of 9091. If there was an immediate need to use the dividend as spending you achieve the same end by not investing all the available funds.

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Re: Topping Up Cum or Ex Dividend

#399780

Postby staffordian » March 28th, 2021, 1:56 pm

In practice, because of market movements, I think the difference is negligible, unless huge purchases are involved.

However as others have said, whulst buying cum-div gives an earlier injection of income, my preference would always be to buy ex-div, to buy a slightly greater number of shares, which, of course, buys a slightly higher level of income for the long term, not just a one off early income benefit.

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Re: Topping Up Cum or Ex Dividend

#399784

Postby dealtn » March 28th, 2021, 2:01 pm

Alaric wrote:
dealtn wrote:Consider you have £10,000 to invest in Company A that trades at £1.10 (cum div) that pays a 10p dividend. You can buy 9091 shares, and pay £50 SDRT. Or, possibly the next day, it goes to £1 (ex div) you buy 10,000 shares at £10 and the SDRT is the same £50.


The point is that if dividends are being reinvested then that dividend received is also going to incur stamp duty. So there's an extra £ 909.10 to invest which will itself incur SDRT when invested.

Without reinvesting In the longer term you get more future dividends by buying ex as you would have 10000 shares instead of 9091. If there was an immediate need to use the dividend as spending you achieve the same end by not investing all the available funds.


Agreed. On the subsequent purchase there are additional trading costs (not just SDRT) to take into account. My reading of the post I replied to concerns "the purchase", which I took to mean singular, and referring only to the initial investment decision.

(Although pedantically, there is no SDRT to pay on a £909.10 purchase - which might actually be the case, and therefore, "HYP Practical" for some, of course).

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Re: Topping Up Cum or Ex Dividend

#399788

Postby scrumpyjack » March 28th, 2021, 2:06 pm

Another factor is your marginal tax rate. You could pay up to 60% tax on that dividend you just bought! (If it pushes you into the loss of personal allowance tranche).

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Re: Topping Up Cum or Ex Dividend

#399794

Postby idpickering » March 28th, 2021, 2:19 pm

I don’t stress about this matter to much, but admit that I do like to buy my chosen picks before they go exdiv.

Ian.

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Re: Topping Up Cum or Ex Dividend

#399796

Postby kempiejon » March 28th, 2021, 2:22 pm

dealtn wrote:
kempiejon wrote:Everything else being equal (it rarely is) I think cum div is better value for money, you'll get more shares for the same cash as the share price falls by the div amount.
I get the psychological effect of thinking your money is working quicker if you see the income plop into your bank account quicker but those still adding new money and mopping up dividends will soon be paying stamp duty to invest those dividends again. As other said buy cum you'll buy a few more shares and save the duty on the dividend amount.

As csearle said it could be a tie breaker and as a new investor it gave me a warm feeling. It doesn't really influence me now but I do look at the amount of any upcoming large dividend amounts when I have additions in mind as I might wait for that dividend to be paid from a share I hold and delay a top up to include it. My buys are monthly using the Halifax regular investment dates but I swap and change my regular dates.


You buy more shares with your money ex div, not cum div!

If you could buy more shares with your money, and get a dividend, I doubt anyone would be asking the question as to which would be better!



Eeek school boy error thanks for catching that and correcting me for other readers.

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Re: Topping Up Cum or Ex Dividend

#399821

Postby Gengulphus » March 28th, 2021, 3:24 pm

moorfield wrote:Interested to know if anyone here has a strict preference on buying or topping up cum dividend?

For run-of-the-mill dividends, no preference at all in my case - I cannot remember the last time that I even looked at whether a HYP purchase of mine was ex or cum a normal dividend before making the purchase, let alone made any decision about the timing (or any other detail) of a HYP purchase based on whether the share was ex-dividend or cum-dividend. I know it makes a small difference with regard to stamp duty, and a somewhat larger (but still small) difference with regard to Income Tax for dividends on shares outside tax shelters, but delaying purchases is likely to make similar-sized or larger differences due to share price fluctuations.

And once I've done the work of making a decision that I want to purchase a share, I don't worry about such small differences - basically, they can be expected to average out in the long run, and I don't really want to delay and then have to repeat large chunks of that work in order to check that the decision is unchanged. So as far as I'm concerned, once I've decided I want to buy a share, the time to buy it is now.

For large special dividends, the tax effects are bigger, and they're frequently accompanied by share consolidations, etc, that complicate the admin. For those, I'll probably wait for them to go ex to reduce the tax effects and admin.

Gengulphus

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Re: Topping Up Cum or Ex Dividend

#399826

Postby Gengulphus » March 28th, 2021, 4:00 pm

dealtn wrote:(Although pedantically, there is no SDRT to pay on a £909.10 purchase - which might actually be the case, and therefore, "HYP Practical" for some, of course).

I think you've got your pedantry the wrong way around: there is SDRT (Stamp Duty Reserve Tax) to pay on all sizes of purchase, while it's Stamp Duty that isn't payable on purchases of £1,000 or less. Unfortunately, the tax we normally just call "stamp duty" is SDRT, and Stamp Duty only applies to share purchases done using paper forms rather than electronically (*). For confirmation of this, see https://www.gov.uk/tax-buy-shares.

(*) Note that any share trade done through the London Stock Exchange is done electronically - even if it's a broker buying or selling a share paper certificate for you. Doing share transactions using paper forms is basically confined to private share trades and share gifts.

Gengulphus

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Re: Topping Up Cum or Ex Dividend

#399848

Postby dealtn » March 28th, 2021, 5:20 pm

Gengulphus wrote:
dealtn wrote:(Although pedantically, there is no SDRT to pay on a £909.10 purchase - which might actually be the case, and therefore, "HYP Practical" for some, of course).

I think you've got your pedantry the wrong way around: there is SDRT (Stamp Duty Reserve Tax) to pay on all sizes of purchase, while it's Stamp Duty that isn't payable on purchases of £1,000 or less. Unfortunately, the tax we normally just call "stamp duty" is SDRT, and Stamp Duty only applies to share purchases done using paper forms rather than electronically (*). For confirmation of this, see https://www.gov.uk/tax-buy-shares.

(*) Note that any share trade done through the London Stock Exchange is done electronically - even if it's a broker buying or selling a share paper certificate for you. Doing share transactions using paper forms is basically confined to private share trades and share gifts.

Gengulphus


Thank you, I've learnt something.

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Re: Topping Up Cum or Ex Dividend

#399850

Postby tjh290633 » March 28th, 2021, 5:24 pm

I subscribe to the view "The time to buy is now" when it comes to topping up. There may be occasions when a special dividend is coming and I want to increase the weight share of a holding. When it goes XD there may be a consolidation, and so the pressure to increase the holding is even more. Another one is where a share split is coming, a la Vodafone. If one is drawing dividends, does one wish to reinvest the special dividend and/or sell the divested share and buy something in its place?

I take the point that buying cum dividend may improve the cash flow, but not necessarily. The comparison may be between a share that pays semi-annual dividends and one which pays quarterly dividends. What is more there may be a 2 month gap or more between XD and payment date. I think that one has to look carefully at the effect on cash flow.

If buying XD leads to a higher cash flow over the next 6 or 12 months, then it may be justified. If buying cum dividend is better, then that is justified.

TJH

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Re: Topping Up Cum or Ex Dividend

#399931

Postby fisher » March 28th, 2021, 10:47 pm

dealtn wrote:
fisher wrote:From a purely logical point of view the share price should drop on the ex-dividend date by the amount of the dividend. So, simplistically you shouldn't be any better or worse off buying cum or ex dividend. However, there is stamp duty to pay on the purchase which would actually make it very slightly more advantageous to buy ex dividend.

In practice the share price will also be subject to market movements which may make you better off going one way or the other. Also, the share price may not drop by the dividend amount on the ex div day, but then this would effectively be unpredictable market movements. If there was any way to predict how to be consistently better off buying cum or ex dividend it would have already been taken advantage of and "arbitraged out".

For me, the only thing that is definitely predictable is the extra stamp duty payable which would make me plump for buying ex dividend if I had to choose. In practice I take no notice of ex div dates when I choose to buy a share as the difference it makes is so small.


What is definitely predictable about the extra stamp duty?

Stamp Duty Reserve Tax is usually at 0.5% of the transaction.

Consider you have £10,000 to invest in Company A that trades at £1.10 (cum div) that pays a 10p dividend. You can buy 9091 shares, and pay £50 SDRT. Or, possibly the next day, it goes to £1 (ex div) you buy 10,000 shares at £10 and the SDRT is the same £50.

If you are only looking at this considering the same number of shares, then it is not just SDRT that is different, but your investment size too (and it is this difference driving the SDRT difference - nothing to do with the dividend, yield, cum div, ex div, or anything else).

The ex-div or cum-div difference (ignoring market fluctuations which are nothing to do with the dividend payment) is only about the timing of the cashflows associated with share ownership. Many seem to like the "obvious" benefit of earlier income (it is an income strategy after all), and then use that "income" to reinvest (sooner) in new shares etc. A similar way of purchasing those new shares arises by buying ex-div, and buying more shares at the outset, since the ex-div price dropping creates this opportunity.


So, the way I see it - you have £11,000 available.

Share trades @ £1.10 cum 10p dividend.
Invest £11,000. Buy 10,000 shares, pay £55 SDRT. Wait for dividend of £1,000 somewhere down the line.

Alternatively
Buy the same 10,000 shares ex div @ £1.00 ==> total cost of £10,000, pay SDRT £50. Immediately "bank" the saving of £1,000 and "save" £5 in stamp duty.

Saving is £5 in stamp duty and you retain the unspent £1,000 you had available rather than it be paid back to you as a dividend at a later date.

You get the same 10,000 shares and (get paid or retain) £1,000 cash in both cases, but buying ex dividend you are £5 better off in SDRT.

As I said, it is all minimal and not really worth the effort, all things considered, but if you are close to the ex dividend date then logically it is clear that buying ex dividend should be slightly advantageous due to the SDRT.

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Re: Topping Up Cum or Ex Dividend

#399961

Postby moorfield » March 29th, 2021, 7:12 am

dealtn wrote:Consider you have £10,000 to invest in Company A that trades at £1.10 (cum div) that pays a 10p dividend.


Without wishing to sound too pedantic, that's a 9% yield which may be a little exaggerated. How do the numbers compare on a 6p dividend, say?


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