Market cycles drive portfolio performance and one of the more reliable recurring cycles in the market is the cycle that is driven by banks and their dividend payment cycles. Banks tend to outperform the overall market in the six weeks prior to going ex-dividend, and as the bank dividend season is fast approaching, we thought it timely to discuss how you can boost your dividend yield by trading bank shares using instalment warrants.
Instalment warrants allow investors to generate higher franked dividend income compared to a direct share investment and can be traded in your self-managed super fund (SMSF).
Instalment Warrants
Instalment warrants have been around for a while and are traded on the ASX. Instalment warrants are a geared investment which give the investor all the benefits of share ownership, including access to the full cash dividend amount and the associated franking credits. SMSF investors can gain the economic benefit of the share ownership for a fraction of the cost of purchasing the underlying shares outright.
Instalment warrants have a six letter code, eg. ANZIOW. The first three identify the stock, the fourth letter the warrant type (I=Instalment), the fifth letter the issuer, and the last letter signals the series (or leverage).
Instalment warrants are a type of warrant listed on the ASX:
- They are a leveraged trading instrument providing investors with upward of 30% gearing on the underlying asset, while having all benefits of share ownership.
- Investors can choose their level of leverage based on their own risk profile, as there are a number of instalment warrants (or leverage levels) available for each stock.
- Before trading instalment warrants , traders need to read and understand the ASX Understanding Warrants Booklet and then sign the Warrant Agreement form. Speak to your broker or contact us at D2MX on 1300 610 024.
The key features of instalment warrants include:
- They are instruments traded and regulated on the Australian Securities Exchange.
- You can trade long and participate in the dividends and franking credits.
- There are NO margin calls.
- Instalment warrants are an efficient way to trade dividend-paying stocks to boost yields.
- No credit checks or approvals required.
The main benefits of trading instalment warrants on dividend-paying stocks:
- Increased dividend income and franking credits
- A lower capital outlay is required to achieve the same dividend income.
- Can offer potential tax benefits.
- The maximum loss is limited to the initial outlay.
- Can be traded in your Self managed Super Funds (SMSF)
The risk of trading instalment warrants:
- As with any leveraged investment product, the price of the underlying asset may fall prior to the time of sale (or even prior to the ex-div date).
- The value of the instalment warrant could fall or be significantly less valuable on its maturity date, or may expire worthless, resulting in a total loss of the initial monies outlaid for the trade.
- Leverage is a two-edged sword: it enhances any gains but would also increase any loss sustained.
Instalment Warrant Terminology
The instalment warrant is made up of three parameters:
- The Instalment Value (the prices at which it trades)
- The Final Instalment Price (the loan amount)
- The Maturity Date (the date on which the Instalment ceases to trade or is rolled)
Case Study
Sam wants to trade ANZ for the dividend and franking credits, and is looking to boost her returns. She plans to trade ANZ on 13th of April 2012 when ANZ is trading at $23.00 (and Instalment Warrant ANZIOW is trading at $13.40), and ANZ is expected to go Ex-div $0.65 on the 12th of May 2012.
Note: This case study is general in nature and does not incorporate any specific tax or personal circumstances of the investor. Please seek any tax advice from a qualified taxation professional.
The Instalment Warrant and Share Trade Comparisons
The trade needs to be held for 45 days to qualify for the franking credits, and the calculations are done assuming no capital gain – that is assuming ANZ pulls back to our original buying price of $23.00, then the trade calculations are as follows (assuming the trader’s tax rate is 46.5%):
So if ANZ pulls back to its original purchase prices after the 45 day holding period and the position is closed, there would be no capital gain on the holding, but Sam would get to collect $2,826, plus $1,174 worth of franking credits for a grossed up yield of 4% in 45 days, if she trades ANZ using shares.
However if Sam traded the ANZIOW instalment warrant then she would collect $4,850 in dividends, plus $2,015 worth of franking credits for a grossed up yield of 6.9% in 45 days, if she trades ANZ using instalment warrant (note if ANZ was trading at $23.00 again, there would be a funding cost of $0.10 cents per share part of which would be tax deductible).
Of course if ANZ is trading above the purchase price after the 45-day holding period, then there would be an additional capital gain (and a capital loss if ANZ was trading below $23.00).
Funding Cost Calculation
In order to calculate the amount you are paying in funding costs, use the following calculation:
Funding Cost = Share Price – Final Instalment (loan amount) – First Instalment Price (initial outlay)
= $23.00 – $10.00 – $13.40 = -$0.40.
The Trade
If you want to take advantage of the bank dividend season, then instalment warrants are an excellent way boost your yield as shown in this Case Study.
Contact me at D2MX on 1300 610 024 and I can help you trade using instalment warrants to boost your returns. Each instalment warrant has a PDS document which details all the features of the specific warrant.’
Warrant Trading for All Types of Market Environments Series
Part 1 – Shorting With Limited Risk Using MINIs
Part 2 – Boosting Dividend Yield Using Warrants
Michael Hevern
Investment Adviser
D2MX Retial Trading
This report was prepared by Michael Hevern. It represents the views and opinions of the author. It is not intended for use by any third party, without the approval of Michael Hevern. While this report is based on information from sources which are considered reliable, its accuracy and completeness cannot be guaranteed. Any opinions expressed reflect my judgment at this date and are subject to change. Contracting Hevern Pty Ltd is a Corporate Authorised Representative No. 408868 of D2MX Pty Limited ABN 98 113 959 596, AFSL No. 297950 (D2MX), and Michael Hevern has been appointed as an Authorised Representative of Contracting Hevern Pty Ltd. Opinions, conclusions and other information expressed in this report are not given or endorsed by D2MX, unless otherwise indicated. The information contained in this Report is General Advice only, as the information or advice given does not take into account your particular objectives, financial situation or needs.
Tags: ASX, Derivatives, dividend yield, Dividends, franking, instalment warrants, investing in shares, smsf, warrants
