Q: What is your opinion on buying ANZ, WBC or NAB shares at the current price to hold for around 13 months, and in doing so, pick up the three dividends that will be paid? My calculations put the returns at around 12% to 14%, including franking credits.

A: This strategy is fairly popular for those investors, particularly SMSFs, who are seeking a high tax-advantaged running yield, and are comfortable with their assessment that there isn’t a lot of downside price risk on major bank shares. Over the 14-month holding period, the after-tax income return is in the order of 12% to 14%, which provides some protection for a downward movement in the share price.

How does the strategy work?

Purchase shares in ANZ, NAB and/or Westpac before they go ‘ex-dividend’ in the second week of November, and receive three dividends (payable in Dec 2012, July 2013 and December 2013), then sell the shares in late December 2013/early January 2014.

Forecast dividends and payment dates are as follows:

To qualify for the dividend to be paid in December, the shares must be purchased before they go ‘ex-dividend’. Ex-dividend dates are:

• ANZ: 8 November
• NAB: 9 November
• WBC: 9 November

Income returns

Assuming a 14-month holding period, approximate gross and after-tax forecast returns (in accumulation and pension) are as follows:

The forecast returns above are for 14 months, so on an annualised basis, they are going to be slightly lower.

Be careful of …

You need to be cognisant of the ’45-day holding rule’ in relation to being eligible for the imputation credits, so you are more likely looking at a 14-month holding period rather than 13 months. Further, share prices do adjust downwards when they change from ‘cum-dividend’ to ‘ex-dividend’. When you come to sell the shares late in December 2013 or early 2014, some part of the final 2013 dividend may already be reflected in a lower share price.

Also, factor in transaction costs, calculating the brokerage on both the buy and sell legs.

The bottom line

If your medium-term outlook for bank shares is positive, there is quite a lot to be said for this strategy. The 12% to 14% after-tax income return provides quite a deal of downside protection on the share price falling.

On paper, NAB would appear to be the stock to go for. However, there are good reasons why NAB is consistently the cheapest major bank stock on a price to earnings ratio (PE) basis and it why pays the highest dividend yield – I don’t think this is going to change in the short term. I would be more inclined to consider Westpac.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.