CFDs and Dividends - What Happens?

Sometimes traders get confused when talking about dividends being paid on the shares for which they hold CFDs. In actual fact, the situation is more straightforward than if you hold the shares themselves, and the basic principles are easy to understand.

First let's consider what happens when you own the actual stocks. There are three dates around dividend time that are important to you. The first is the ex-dividend date, as if you buy the stock on or after that date you are not entitled to receive the next dividend. The second date is the record date. The record date is three days after the ex dividend date, and is the date when the investor must hold the shares in order to receive the dividend. This has to happen because it takes three days to settle the purchase of a share.

The third and final date is the payment date, which may be a couple of weeks after these dates, and that's when the dividend check actually gets sent to the shareholde.

Now if you're trading in shares using CFDs, the situation becomes simpler. You probably know that there are various charges and credits to your account while you hold an open CFD position, and the dividend adjustment is just another one of these. Typically, the actual dividend payment made by a company is usually made a few weeks after the ex-dividend date. For instance, ABC Industries might go ex-dividend on the 3rd August but pays the dividend money on the 10th of September, however when owning a CFD over this period you'll be credited the dividend on the following business day.

If you hold a long position in shares with CFDs, and held the day before the ex dividend date, then you become entitled to a payment equivalent to the amount of the dividend. Remember that you must be in the position prior to the ex-dividend date to receive the dividend. For instance if the share you controlled through a CFD went ex-dividend on Wednesday, then you will need to have bought in at least on Tuesday to earn the dividend credit.

If you are short the shares using CFDs, the situation is different as you now owe the equivalent of the dividend, and it will be debited to your account. Holding a short position is good in one way, because you get paid interest instead of paying interest on the margin as you do when you are long, but this is one place where you have an immediate apparent loss.

Thus, if you are short selling a security (i.e. standing to gain from the position if the share price falls in value) and you are short prior to the ex-dividend date, then you will owe the dividend.

Having said that, the situation is not so clear-cut as it appears from those statements. What you must also consider is that the share price will change on the ex dividend date to reflect the amount of the dividend, more or less (although some traders make use of a dividend trading strategy to exploit market inefficiencies). On the ex dividend date you can expect the value of the shares to drop by nearly as much as the amount of the dividend, which maintains a level equity for the conventional shareholder.

What this means in practice is that your long CFD position can be expected to take a hit, even while you are receiving funds for the dividend amount. The short position will make a profit which offsets the dividend debit to your account. 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 there should only be a marginal adjustment to your total value in the holding whether you are long or short.

Key Dividend Dates

Cum Dividend: This means the stock is trading with the dividend attached to it and buyers stand to receive the benefit of the dividend.

Ex Dividend: If the stock is acquired on the ex dividend date the buyer is not entitled to the dividend. The share must be purchased before the ex dividend date to be entitled to the dividend. This is the most important date for most CFD traders as traders have to buy the stock prior to this date to receive the dividend. In other words to qualify for recieving the imminent divident payout, you need to be the owner of the shares before the market opens on the ex dividend date. So if the XD date happens to be a Wednesday (which it most often is) you need to own the stock by close of market on the Tuesday (unless you have access to buy outside market hours nearer the start of XD-Day). If you sell the stock after the market opens on the XD day - even a few seconds after the market opens - you still get the dividend - it will come to you on the 'Dividend Payment Date' (typically several weeks later) even though you no longer hold the stock. On the ex-dividend date the share typically falls in value by an amount equivalent to the dividend paid.

Record Date: This is the date that investors have to be recorded as shareholders. Since the purchase of a stock is not settled until T+3, 3 days after the stock is traded, the record date is 3 days after the ex dividend date. In practice you can pretty much ignore the 'record date' - it is an administrative factor only - most commonly a Friday of the same week. On that day you will be registered as having been the qualifying owner of the stock on the relevant pre-XD date or time, even if you sold in between the XD date and Record Date. (though do keep an eye out for the dividend being automatically forwarded to you on the Payment Date - in case some sloppy broker has not kept track and you need to chase it up). Unfortunately the protocol formally applicable to announcements of dividend dates requires that the Record Date be the date most prominently indicated, even though it isn't the date of greatest importance when buying and selling.

Payment Date: This is the day that dividends are paid out and could be weeks after the record date. You do not need to own the share on the payment date, although it is necessary to own it on the record date.

Incidentally, you are the owner of the stock (and qualify as such) at the moment the contract occurs (as shown on Contract Note) - regardless of when you pay (or even if, having 'sold' before payment for the purchase was due, you don't pay).

EDIT: But be aware that 'dividend fishing' (buying just to qualify for the imminent dividend, and then immediately selling) is harder than it might look - as the share price normally takes a hit equivalent to the dividend on ex-dividend (because once the market has opened on that day the shares no longer come with the perceived benefit of an imminent dividend payout attached - they are then being bought ' ex' the dividend entitlement).