Replies to post #28877 on BIH Corporation (fka BIHC)

[smokey888]

Holding Period Requirement

As mentioned above, Congress doesn't like "dividend stripping." Uncle Sam wants you to be fully at risk in the stock for a period of time if you are to get the lower 15% dividend tax rate. This is an interesting notion, since economics texts always teach that the market prices the anticipated dividend into the stock's market price. If this is true, then dividend strippers are already paying for the dividend they are about to receive; unless of course they buy the stock far enough in advance of the ex-dividend date that the dividend has not yet been priced in. And if "strippers" buy the stock this far ahead, aren't they holding the stock long enough to be at meaningful economic risk?

Be that as it may, Congress has taken a mechanical approach to require that we be at economic risk and enforces a complex holding period. Current law provides that, in order to get the 15% rate, you must hold the dividend-paying stock for at least 61 days within the 120-day period straddling the ex-dividend date. "Straddling" means the 60 days before and after the ex-dividend date. So if the stock goes ex-dividend on July 1, you would have to hold the stock for 61 days sometime during the straddling period from roughly June 1 through September 1. Note that the day the stock is purchased is not counted, so you cannot buy the stock the day before the ex-dividend date and hold the stock for the required 61 days during the straddle period - your holding period would in that event be only 60 days, not quite enough for the dividend to be QDI.