CFD Dividends

What are dividends?

Dividends are money, stock or property offered by companies to share holders as a way of sharing their profits. Dividends are usually quoted as the amount each share will receive, meaning the total dividend payment will be the dividend amount multiplied by the amount of shares a share holder owns.

Dividends are issued twice a year with the two payments known as the interim dividend and the final dividend.

Can I earn dividends in CFD trading?

As share CFDs capture every aspect of share trading, CFD holders receive the same dividend payments as share holders. And, as CFDs are geared products, this magnifies your returns in comparison to your initial investment.

In the case of Westpac, which paid dividends of $0.76 per share in July 2011, you would receive $0.76 per share whether you were a share holder or a CFD holder. However, as you would only have made a 5% deposit to invest in the CFDs, you would have made a greater return on your investment.

For example, for a share holder to invest in 1,000 Westpac shares, currently valued at $21.78, he would have to pay the total value of the position, or $21,780 (1,000 x $21.78). As a CFD holder, you would only be required to pay a 5% margin to open your position, or $1,089 (5% x $21,780).

Buying either CFDs or shares allows you to profit on increases in the share price, or make a loss if the price falls.

When you are paid dividends for your 1,000 shares, it will be a payment of $760. This is a 3.5% return on your initial share investment of $21,780. However, in the case of CFDs, it is a 69.8% return on your initial investment of $1,089.

Before you start spending your profits, here are some considerations to keep in mind - franking credits, daily interest charges on CFDs, and short selling.

How do I get paid CFD dividends?

To receive a CFD dividend payment, you must be long on the CFD before the ex-dividend date and hold it until the ex-dividend date (note: you are able to close your position on the ex-dividend date and still receive the dividend) - the ex-dividend date being the date by which an investor must own stock before being eligible for a dividend payment.

Franking credits

Franking credits are tax credits that share holders receive for tax the company has already paid on its profits before the dividend payment. When filling personal income taxes, the share holder will include both the dividend payments and the franking credits as income. This prevents shareholders from being taxed twice on the same dividends - once through the company taxation, and a second time through personal taxation.

CFD holders do not receive franking credits.

CFD financing

CFD financing is the daily interest your open CFD positions will be charged overnight - this will be charged for any CFD position kept open after the close of the trading day, and this will be subtracted from your dividend payments and commissions to calculate your net profit. The daily interest rate adjustment is calculated as follows:

Daily interest rate adjustment = (number of shares x closing price x annual interest rate) / 360

The annual interest rate is generally the current inter-bank rate plus 2.5% for long positions, and minus 2.5% for short positions.

In our previous example of 1,000 Westpac shares, the daily interest adjustment would be:

(1,000 x $21.78 x 7.38%) / 360 = $4.46 per day

Please note this figure will change each day with share price fluctuations.

Although this may not seem like much, if you hold the position for several months this will add up, and eat into your profits.

How to earn CFD dividends without paying too much interest

The trick would be to locate shares that are trending up and that pay a solid dividend, then hold them for a couple of weeks prior to the ex-dividend date. This will allow you to benefit from the dividend payment without paying too much interest, and then sell the shares at a higher price for a healthy profit. However, you also need to take into account that, all things being equal, the price of a share will generally decrease by the dividend.

Short selling

The Westpac example discussed how dividends would work if you went long (bought the share CFDs in the hope the value would rise). When you hold a long position your account is debited to reflect interest charges, and credited to reflect dividend payments.

When you hold a short position you sell CFDs in the hope their value will fall, and then you can buy them back at a later date, making a profit on the difference. As this transaction is the opposite of going long, the credits are also opposite - you may be credited any interest charges, and debited any dividend payments.
To avoid being debited the dividend payment, you would have to close your short CFD position before the ex-dividend date.

Conclusion

Dividends can be an excellent way of generating cash flow from CFD positions, and coordinating your long positions around dividend payments can be a good strategy for increasing the profitability of trading. However, keep in mind that interest charges will impact your profits, and can make CFDs an expensive product in the long-term.

A good place to start learning more about trading with charts is by visiting my favourite CFD trading site. They offer charts that are both suitable for the beginner and the most experienced traders and also a free demo of their trading platform. Start your CFD trading journey today.

CFDs are leveraged products, meaning you can lose more than your original deposit. CFD trading might not suit everybody, so please ensure you understand the risks involved.