The equities markets continue to trade higher this year, led by the banks and other high yielding stocks in the markets (which we identified back in December). Today we’ll show you a strategy that has the potential to significantly ramp up your returns in your self-managed super fund (SMSF).
The market has bounced this week as the banks found support due to their dividend payment cycles. Banks tend to outperform the overall market in the six weeks prior to going ex-dividend and we are now in that bank dividend season.
So today we discuss how you can boost your dividend yield by trading the bank shares using Instalment MINI Warrants. Instalment MINI Warrants are attractive because they allow investors to generate higher franked dividend income compared to a direct share investment and can be traded in your SMSF to ramp up your dividend income through franking credits (credits for tax already paid by the company paying the dividends).
Instalment MINI Warrants
Instalment MINI Warrants are the latest generation of Instalments Warrants providing straightforward and transparent leveraged exposure to Australia’s leading companies. For self managed super funds, Instalment MINI Warrants are one of the few means of gaining leverage in a portfolio, and they’re listed and traded on the Australian Securities Exchange. There are no margin calls, no credit checks and importantly investors are unable to lose more than their original investment amount.
These warrants are designed for individuals and SMSFs seeking medium to long term exposure. Investors gain the economic benefits of share ownership, including dividends and available franking credits, for a small portion of the cost of purchasing the shares outright. As the loan is non-recourse in nature it is an approved investment product for SMSFs.
We have outlined the features and benefits to trading Instalment MINI Warrants in a prior article.
Instalment MINI Warrant Terminology
The Instalment MINI Warrant is made up of 3 parameters: the Instalment Value (the price at which it trades), the Final Instalment Price (the loan amount), and the Maturity Date (the date on which the Instalment ceases to trade or is rolled).
Trading Risks – Instalment MINI Warrants
The risks of trading Instalment MINI Warrants include:
• 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 also increases any loss sustained. On the maturity date, your Instalment MINI warrant may be significantly less valuable or may expire worthless.
• If a Stop Loss Trigger Event occurs, the amount a holder receives may be nil.
• Dividends are not final and not guaranteed to be paid.
Case Study
Sam wants to trade ANZ for the dividend and franking credits and is looking to boost her returns. She trades ANZ on the 10th of April 2013, when ANZ is trading at $28.20 (and Instalment Warrant ANZJOI is trading at $8.00), and ANZ is expected to go Ex-div $0.70 on the 9th of May 2013.
Chart: ANZ Trade (produced in d2mxIRESS platform)
Table 1: ANZ Trade Setup
The Instalment MINI Warrant Versus 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 $28.20, then the trade calculations are as follows (assuming traders tax rate is 46.5%).
Table 2: ANZ Return on Investment Calculations (assuming ANZ share price remains steady).
[Funding Cost = Loan Amount (=STRIKE @ Entry_date) *Funding_Rate * Holding_Period/365 = $8.00 * 7.45% * 45 /365 = $0.19]
If ANZ pulls back to its original purchase price 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 $1,241, plus $532 worth of franking credits for a grossed up yield of 3.5% in 45 days, if she traded using ANZ shares.
However if Sam traded the ANZJOI Instalment MINI Warrant, then she would collect $4,375 in dividends, plus $1,875 worth of franking credits for a grossed up yield of 12.5% in 45 days, (note if ANZ was trading at $28.20 again, there would be a funding cost of $0.12 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 conversely a capital loss if ANZ was trading below $28.20). There are additional strategies that allow you to lock in higher prices if the stock runs up for the dividend and we can help you with this – contact us at D2MX Advisory now on 1300 610 024.
Note: This case study is general in nature and does not incorporate any specific tax or personal circumstances of the investor. Investors should not rely on the information and should obtain specific advice before investing in this product.
The Trade
Instalment MINI Warrants are the latest generation of Instalments Warrants and 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. SMSF investors can gain the economic benefit of the share ownership for a fraction of the cost of purchasing the underlying shares outright.
If you want to take advantage of the bank dividend season, then the Instalment MINI Warrants are an excellent way to boost your yield. Contact us at D2MX Advisory on 1300 610 024 and we can help you trade using Instalment MINI Warrants to boost you returns. Each Instalment Warrant has a PDS document which details all the features of the specific warrant.
Note that before trading Instalment MINI Warrants, traders need to read and understand the ASX Understanding Warrants Booklet and then sign the Warrant Agreement form, or contact us at D2MX Advisory now on 1300 610 024.
For more trade ideas and recommendations sign up for a free trial of the D2MX Daily Trading Report, which provides a daily serving of insightful market analysis from the D2MX Advisory team, including:
• Trade ideas and strategies
• Dividend enhancement strategies
• Market scans to watch
• International market analysis, and
• Highlights from the S&P/ASX 200
To request an obligation-free trial, sign up at www.d2mx.com.au/personal/general-advisory/ or email advisory@d2mx.com.au.
Michael Hevern
Investment Adviser – D2MX Advisory
See Also: Boosting Dividend Yield Using Instalment Mini Warrants
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.
Disclaimer: Using leverage to invest can be a two edged sword, as it can magnify your returns when the stock price rises, but will in turn magnify the losses if the trade does not perform as expected.
