Do I get dividends from CFDs? And how does the process work?

Question:

Do I get dividends from CFDs? And how does the process work?

Answer:

One of the attractive things about CFD share trading is that, by holding a CFD, you are eligible for many of the benefits that you would receive if you held the shares outright through a traditional means of trading.  This includes being able to get a dividend adjustment from CFDs.

There are a few exceptions to the rule, such as voting rights, as you do not physically hold the share with a CFD.  Other exceptions are more beneficial, such as being able to short shares, which is something that you cannot do through the traditional route.  CFD share trading mirrors the underlying equity market it tracks.  This means that when a share pays a dividend to its shareholders, most CFD providers will do the same.

If you hold a share CFD immediately prior the ASX market open, on the morning of that share’s ex-dividend date, your account will have a dividend adjustment posted to it.  If you have a long share CFD position in this company, you will have a positive dividend adjustment, and if you have a short position you will have a negative dividend adjustment. The amount of the dividend adjustment is the declared cash dividend multiplied by the number of share CFDs held.  It is also important to recognise, that when you hold a share CFD position you do not own the underlying shares, and therefore you do not receive or pay any franking credits.

Many CFD providers will make the dividend adjustments to your account on the same or next day, which can actually be a quicker pay-out in comparison to traditional shareholders who can wait for up to two or three weeks for their payment date.

For example, to be eligible for a positive dividend adjustment in ANZ share CFDs, and ANZ’s ex-dividend date was Thursday 10th May 2012, you would need to open a long position in ANZ on Wednesday 9th May 2012 or earlier, and still have that long position open immediately prior to the ASX open on Thursday 10th May 2012.  In this example, if you opened a short position instead of a long position, you would receive a negative dividend adjustment.  This dividend adjustment would be made on the morning of Thursday 10th May.  Ordinary shareholders in this case would have had to wait until 2nd July 2012 to receive their dividend.

Each time a dividend is credited or debited from an account, it will show as an individual entity on the client statement.  This can be useful for when you want to keep records of each transaction for tax purposes, where appropriate.

It is important to consider dividend credits and debits when taking any medium or long-term position with a CFD.  Receiving a potential dividend credit can be a bonus when looking to take a long-term position on an equity.  Conversely, you should factor in any potential dividend debit you may encounter when shorting a share over the long-term, in order to be sure that your account holds sufficient funds to keep the position open.

While these factors are something to consider for some trading strategies, some investors look to trade for dividends specifically, as a part of their trading portfolio.  This is a method often referred to as ‘dividend stripping’.  This is where traders will open a long position before the ex-dividend date of a stock, and then sell it after the ex-dividend date in the hope of profiting from the dividend adjustment.  This will work if you are able to close the long position after the ex-dividend date at either a profit, or a smaller loss than the positive dividend adjustment that is received.

Australian shares are seen as quite attractive for this method for a couple of reasons.  Many Australian shares will pay a dividend twice a year and many of these dividends will also come as franked, with the tax already deducted from them.  As a CFD trader, you won’t receive any tax credits, but in terms of keeping track of your transaction history for accounting purposes, as mentioned earlier, it can be a welcome benefit.

Of course, a lot of these points will be dependent on your CFD provider.  Not all providers have the same dividend policy and it could have an impact on your trading.  It is best to check the CFD contract details for guidance, which should be available on the provider’s website.  The majority of Australian CFD providers have outlined a policy on dividends, but it is always worth checking prior to investing, as it can offer insight into the various scenarios, such as how soon your trading account would be credited or debited.

Above all else, ‘dividend stripping’ and all other CFD trading strategies should only be undertaken once you have considered a broad range of market analysis.  Plan ahead as to when you want to enter and exit the CFD, in order to help your chances of success.