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What CFD Traders Should Know About Dividends

Dividends are a subject that is sometimes overlooked by CFD traders.

However, there are several facts about dividends that any trader should know because they affect the way stocks behave on certain dates.

In this CFD basics post, we cover everything a CFD trader needs to know about dividends.

Yes, CFDs on shares do pay dividends

Just a like a stock, if you own a CFD you will receive a dividend if you own it the day before the ex-dividend date (more on that later). On the dividend payment date, an amount equivalent to the dividend for each share you have exposure to will be paid into your trading account. However, you may also find that the stock price falls by a similar amount to the dividend on the ex-dividend date.

No, CFDs on indices and index futures don’t pay dividends.

Futures are priced slightly differently, and the dividend is excluded from the price of a future when it is traded. Cash indices themselves are not traded and don’t pay dividends, so cash index CFDs are usually based on index futures. Indexes are affected slightly when index constituents pay a dividend, but the effect is barely noticeable.

Important dates to know about with regard to dividends

When a company pays a dividend, a sequence of events takes place according to a schedule. This is to ensure that the dividends are paid to the right shareholders.

Declaration date: Firstly, the company will announce the amount of the dividend and the relevant dates. This often happens on the same day the company announces its results.

Last date to trade: This is the last day you can buy a share and still receive the dividend.

Ex-dividend date: On the day after the last day to trade, the share trades without the dividend. If you buy a share on this day you will not receive a dividend.

Record date: The record date is the same as the settlement date for trades that took place on the last day to trade. Anyone that owns a share on this day will receive the dividend. This date is after the ex-div date because trades take a few days to settle.

Payment date: Dividends are paid on the payment date which is usually a few days after the record date.

 

 

How to incorporate dividends in your trading

While dividends are usually the focus of long-term investors, traders can also earn dividends and incorporate dividends in their trading plan.

Dividend stripping is the practice of earning dividends by only owning a share for a few days. When a share trades ex-dividend, buyers are no longer entitled to dividends, so the share price should fall by exactly the amount of the dividend. You may notice that on an ex-div date, the whole CFD spread for a share falls a percentage or two. In reality, the stock price usually drops less than the dividend. If that does happen, you can profit by buying the share (or a CFD) with the best dividends on the last day to trade and selling on the ex-div date. You will make a loss on the shares but will end up with a small profit when you receive the dividend.

Sometimes the market forgets a share is trading ex-div, and the price doesn’t immediately fall at all. In that case, a profit can be made by shorting the share – provided the dividend is large enough to cover trading costs.

What dividends can tell you about a company’s health

Companies pay dividends out of their profits. The dividend is usually a fixed percentage (about a third) of the company’s earnings per share. Analysts forecast dividends, along with earnings and revenues for each company. The average analyst forecasts for dividends can be found on a dividend forecast schedule.

When the dividend is declared, it will either be in line, above or below forecasts. If the dividend is well ahead of the analyst forecast this is positive. If the company’s dividend is beginning to grow consistently, dividend growth investors will take notice and the share price may appreciate.

If the dividend is below expectations, this may signal bad news. For a start, it means the company is not doing as well as analysts thought. Dividends are paid in real cash, while earnings are really just a book entry and can be manipulated. So, if earnings are still increasing, but dividend are not, the company may have a cash flow problem. These are all pieces of information that can tell us more about a company.

Conclusion

Traders often don’t pay much attention to dividends. However, it’s good to know how they are paid out so that you can check when you are receiving them. It’s also good to be aware that a stock might bounce ahead of an ex-div date, and then fall on the day it trades ex-dividend.

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 67% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

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