Trading Share CFDs gives you exposure to the movement of underlying shares. There are a few issues that are specific to Share CFDs and differ from for example trading Forex or commodity CFDS. One of these issues is that of company dividends. This article aims to clarify the potential impact of dividends of the CFD trader.
How do dividends work?
One of the attractive things as a shareholder is the receipt of company dividends. Many Australian companies pay such dividends twice a year, calculated at X cents/per share multiplied by the number of shares held.
The key date in respect of dividend entitlement is the ex-dividend date, with eligibility for the dividend being dependent upon you holding a position in that share before trading commencing on the “ex-dividend” date.
These dates, and the dividend amount per share, are pre-determined by the company and are made available in the public domain (usually confirmed in company reports) and are available across many financial websites.
Also, important to understand is this dividend is “priced in” to the share already the underlying share price is expected to open at closing price minus the dividend paid (of course there are other factors pre-open e.g., economic news overnight, which will also impact but in this article we are focusing on the dividend impact).
Hence if the dividend per share is 20c then we would expect the underlying share to open 20 cents lower.
CFDs and dividends
As a CFD trader, you do not own the underlying asset (in this case the shares), rather you have a contract based on the movement of such and hence you will not be able to receive any benefits of “franking credits’ for tax purposes. However, there is an adjustment made on your CFD account position relating to dividend.
Whether this adjustment is shown as a credit or a debit will be dependent on the direction of your trade. Long trades will attract a credit and short trades a debit adjustment.
A dividend trading strategy
There are some traders of shares, options and CFDs that look to develop a specific trading strategy for dividends and CFDs. Generally, this involves entering a long position prior to the ex-dividend date and subsequently selling afterwards looking for either a small drop less than the dividend adjustment or a recovery or greater move higher than the price prior to the ex-dividend date.
Theoretically, the reverse could also be the case in that a short trade is entered, with the perception that many will sell after the ex-dividend date, once a dividend has been received, to the extent that this drop will exceed the dividend adjusted debit to the CFD position.
In either case, if you are considering these somewhat advanced strategies, logically you have tested a system which not only identifies potential situations but guides your entry and exit timing and decision-making.
Further discussion on this may be included in a further article.
We trust that has clarified the dividend treatment of Share CFDs and of course please contact our team with any further questions you may have, or if learning to trade share CFDs could be for you.