Dividends and CFDs – What Happens?

Dividends and CFDs – What Happens?

Traders often get lost when they think of dividends being paid on the shares they keep CFDs for. The case is currently easier than if you own the shares yourself, so the fundamental rules are easy to grasp.

Let’s first discuss what happens when you own the real inventories. Three dates are relevant to you during dividend time. First, the ex-dividend day, even though you cannot collect dividends unless you buy the stock on or after this day. The second date is the date of the document. The record date is three days after the ex-dividend date. This is the day from which the holder can retain the stock to collect the dividend. This needs to be as the purchasing of a share takes three days to clear.

The third and final date is the payment date, which may be a few weeks after those dates. That is when the dividend check is actually sent to the shareholders.

Now, if you use CFDs to trade in shares, the situation gets simpler. You already know there are various costs and credits to your portfolio when you have an open CFD position, so the dividend increase. Generally, a company’s final dividend payout usually happens a few weeks after the ex-dividend date. For example, ABC Industries may go ex-dividend on August 3rd and pay the dividend money on September 10th. So the dividend payment happens on the next business day because you buy a CFD during this time.

You qualify for a bonus equal to the dividend’s value if you have a long position in shares with CFDs and holding the day before the ex-dividend date. Note you have to be in a position to collect the dividend before the ex-dividend date. Suppose the share you owned with a CFD went ex-dividend on Wednesday, then you would need to buy in on Tuesday at least to receive the dividend credit.

When the shares are short use CFDs, the case is different because you owe the dividend equal now, as it will be debited to your account. Holding a short position is good in one way because instead of paying interest on the margin. You get paid interest as you do when you’re long, but this is one place where you get an immediate apparent loss.

So if you sell a stock immediately (i.e., standing to benefit from the position if the share price falls in value) and are short until the ex-dividend date, then you owe the dividend.

The case isn’t as clear-cut as those comments say. What you must also consider is that on the ex-dividend date. The shares price will change to more or less reflect the amount of the dividend. (Although some traders use a dividend trading strategy to exploit market inefficiencies). You should expect the shares’ value to drop by about as much on the ex-dividend date as the sum of dividends. This retains level equity for the traditional shareholder.

In effect, all it means is that you should expect a hit from your long CFD role, even though you collect funds for the dividend number. The short position will yield a profit that offsets your account’s dividend debit. Usually, the share price does not adjust by the total amount of the dividend, which leads to the trading technique called stripping the dividend. But you will find that your total value in the holding should only be adjusted marginally whether you are long or short.

Dates of Key Dividends

Cum Dividend: This means the stock trades attaches to the dividend, and buyers will receive the dividend benefit.

Ex-Dividend: If the stock acquisition takes place, the buyer is not entitled to the dividend on the ex-dividend date. To be eligible for the dividend, the purchase of the share must occur before the ex-dividend date. For most CFD traders, this is the most important date since traders have to buy the stock before receiving the dividend. In other words, you need to be the owner of the shares before the market opens on the ex-dividend date to qualify to receive the impending dividend payout.

So if the XD the date happens to be a Wednesday (which it is most often). On Tuesday, you need to own the stock by closing the market. Unless you have access to buy outside market hours closer to XD-Day’s start. When you sell the stock after the opening of the market on the XD day, just a few seconds after the market’s opening, you will get the dividend. That will come to you on the ‘Dividend Payment Day’ (usually weeks later) even if you no longer own it. The share typically falls in value on the ex-dividend date by equivalent to the dividend paid out.

Record Date: This is the date the shareholders must register as investors. As the stock acquisition payment does not occur until T+3, 3 days after selling the stock, the record date is 3 days after the ex-dividend day. In reality, you should pretty much disregard the ‘keeping date’. It’s just a logistical consideration, more usually the next week’s Friday. On that day, even if you sold between the XD date and Record Date, you will register as the stock’s qualifying owner on the relevant pre-XD date or time.

(While keeping an eye out for the dividend automatically sent to you on the payment date. If some sloppy broker has not kept track and you need to chase it). Unfortunately, the protocol generally applied to dividend days notifications allows the Record Date to be the most explicitly specified. Even though it is not the most relevant date for buying and selling.

Payment Date: This is when the dividends payment occurs and might be weeks after the record date. You will not need to own the interest on the payment date, but it must be held on the date of ownership.

Incidentally, when the deal happens, you become the purchaser of the stock (and count as such, as seen on the Deal Note). This is irrespective of what you pay (or even whether, having ‘sold’ before payment for the order was due, you do not pay).

To conclude

Be mindful that ‘dividend hunting’ (buying only to register for the eventual dividend and selling immediately) is tougher than it seems. Because the share price usually takes a knock equal to the ex-dividend dividend. Because after the market has opened on that day, the shares no longer come with the expected advantage of the inevitable payment of the dividends attached. They are, instead, being paid out.