When most of us think of contracts for difference, we are often concerned with leverages, underlying assets and the length of the contract in question. It is therefore a bit odd that dividends are one of the most overlooked subjects and yet, that their role within this industry is quite important. Let us take a quick look at the nature of dividends in relation to CFDs as well as how long and short positions could impact the effects of these dividends upon the trader.
It is arguably a lesser-known fact that ANYONE who holds CFD shares within a certain company is entitled to dividends. Of course, this is under the assumption that such dividends are offered. The best way to determine this is to visit the corporate website of the firm in question. It should already be a foregone conclusion that conglomerates such as Apple and Facebook offer such dividends.
Dates to Keep in Mind
One of the first aspects to consider when dealing with CFD shares that provided dividends are dates associated with the trade. The three most important days to highlight are:
- The ex-dividend date
- The record date
- The payment date
The ex-dividend date represents the final date that a CFD holding can be purchased to receive the subsequent dividend. The record date is the amount of time that the associated CFD must be held in order to receive the dividend. The payment date (as may be obvious) is the date when the actual dividend payment is received. This will normally be two weeks after the ex-dividend date (1).
Long Versus Short CFD Positions
Traders need to be aware that long and short CFD trades will have upon their ability to collect dividends. Longer CFD positions are quite different, as dividends tend to be viewed as “credit” payments towards a live trading account. As soon as the firm declares the next ex-dividend date, the cash equivalent of the dividend is transferred into the account of the trader. Please note here that the individual must have held the CFD share AT LEAST a day before the ex-dividend date was announced. However, it is not obligatory to hold the CFD when the payment date is reached to receive the dividend payment.
Those who are interested in short CFD positions can view a dividend as a charge to their account. Note the difference here in relation to long holdings. Let us assume that a short position is executed a day prior to the ex-dividend date. As opposed to receiving these funds, the cash equivalent of the dividend will be debited from the trading account the day after the ex-dividend date.
The Importance of Share Prices
A final concern relates to the price of the CFD shares themselves. Keep in mind that the dividend paid will be “deducted” from the price of the share. In other words, the listed share price could show a loss the day that the dividend is issued (the ex-dividend day). This figure may actually be as much as the dividend payment itself.
Those accounts in long positions will obviously show a loss the day of the dividend issuance. Short accounts will actually display a gain and offset any loss that may be incurred by a dip in the share price.
Ultimately, it is very rare for the share price to completely readjust after dividends have been issued. They are more likely to return close to previous levels and any discrepancies are marginal at best.
Are Dividends a Wise Option?
While there is no doubt that online portals such as CMC Markets are able to provide a number of potential benefits, CFD dividends can add another “string” to the financial “bow” in terms of sustainable wealth. Of course, this depends upon whether one prefers long or short positions. It is also important to remember that different CFD providers will have their own rules regarding investments and subsequent outcomes. It is always a good idea to research this area carefully before becoming involved in what could theoretically prove to be a very lucrative opportunity.