With a rental property, assuming no vacancies and a fortnightly rent income, there is a very consistent, even, predictable flow of income. Buyers of property will not be concerned with when the rent is due next, because at worst they will miss out on 13 days income, which is a fairly small amount in comparison to the purchase cost of the property.

With shares however, income is distributed much less frequently, less evenly, and less predictably. While this may sound like a negative, once you are aware of this inefficiency, you can exploit it. When an investor buys a share, the difference in effective purchase cost is influenced to a much greater degree when dividends are taken into account.

Example:

Investor A buys a $30.00 share which paid out a 50c dividend the day before he bought.

Investor B buys a $30.00 share that pays out a 50c dividend the day he bought.

Investor A has to wait another 6 months before he receives any income from his investment, and again in a further 6 months. This means that over a 365-day period, he receives 2 dividend payments. The average investor would expect this, and would not consider that there is a better option.

Investor B gets a return on his investment after only one day, plus he receives another payment in 6 months time, and again in a further 6 months. This means that over a 366 day period, he receives not two but three dividend payments. His effective purchase price is $29.29 ($30.00 less 50c dividend and 21c franking credit)

Investor A invests for 365 days and receives two dividends, or $1.00 per share. His net dividend yield is 100/3000 = 3.33%. Investor B invests for 366 days and receives three dividends, or $1.50 per share. His net dividend yield is 150/3000 = 5%. Investor B invests for 0.27% longer (366 days Vs 365), but his dividend yield is a 50% increase on that of Investor A (5% Vs 3.33%).

Had both investors bought instalment warrants instead of shares, they may have found that the returns were 10% for Investor A and 15% for Investor B, quite possibly the difference between a positive geared scenario and a negative geared one.

To put this in rental property terms, Investor A bought a house expecting and receiving the normal fortnightly rent, while Investor B bought a house which included six months rent in arrears. Naturally this would never happen with property, but it happens frequently with shares. The timing of a share purchase can make a big difference to the return produced and the effective purchase price. Be sure to allow for dividends when you consider investing in equities.

This strategy involves buying stock or instalment warrants shortly before a dividend is paid, and holding it for just over 12 months. Over this period three dividends will be received, and any capital gains after 12 months will be taxable at half the normal rate. This means that a dividend with a yield of 5% can be purchased on margin and made to produce 7.5%, in effect creating a positively geared investment.