Position Trading #7: Dividends
Oct 10, 2011 at 10:48 am in Position Trading by
Unlike shorter-term swing trading (my next article) and ultra-short-term day trading, position trading may be thought of as something more akin to investing. As such, it is not unreasonable for a position trader to expect to receive a stream of dividends over the life of a trade.
Dividends on Spread Bets?
Many first-time spread bettors will not even consider the impact of dividends on their trading returns, and may not even realise that spread bets pay dividends (or the equivalent adjustments or credits) just as traditional share holdings do.
It’s hardly surprising that novice spread bettors don’t think about dividends, because the spread betting companies don’t shout as loudly about them as they do about tight spreads, fast execution, and other inducements to engage in ‘day trading’.
It’s also hardly surprising that spread bettors don’t think about dividends when the spread betting companies sometimes seem to encourage the trading of non-dividend-paying foreign exchange currency pairs and commodities (like gold and oil) rather than dividend-paying equities. Although, admittedly, they do also encourage index trading, and stock index spread bets do indeed pay dividends (or equivalent) if you hold them long enough.
Offsetting Financing Charges
If we are going to hold spread bet positions for as long as possible – but no longer – while the price is rising, the dividends that we collect along the way may be useful in offsetting the daily financing charges levied by the spread betting companies on rolling spread bets.
In an ideal world, financing charges equivalent to (let’s say) 5% would be offset entirely by an equivalent dividend yield of 5%. In this case a longer-term spread bet position would pay its way through dividend income, rather like how a buy-to-let property investment pays its way through rent income, and in both cases the capital appreciation would effectively come for free. Unlike with the notional buy-to-let investment, capital appreciation of our stock positions would be assured, because, if the price didn’t keep going up (or at least stand still) then we would stop out and not keep on holding.
Funds for Pyramiding
In the fourth article of this series how profitable positions might be pyramided by introducing more funds for greater gains. Well, those additional funds must come from somewhere, and, theoretically, that ‘somewhere’ might be the surplus dividends that are not required for offsetting financing charges. Yeah, right! But it’s a nice idea.
How important are dividends to spread bettors?
The ideal scenarios just outlined are not guaranteed, nor even usual, but it’s worth keeping in mind because every little helps when it comes to offsetting financing charges and providing funds for pyramiding positions. I see dividend income as a bonus afforded to position traders but denied to shorter term spread bettors, commodity traders, and those dabbling in Forex trading. But it is just that — a bonus!
While I always keep in mind the points raised in this article, unlike a true ‘investor’ I would never establish a stock position solely for the promise of dividend income.
Tony Loton is a private trader, and author of the book “Position Trading” (Second Edition) published by LOTONtech.
I find the information helpful all spread betters need as much information as possible,I deal a lot in the UK100 rolling and the DAX 30, I get dividends from uk 100 but not DAX, THIS IS ONE THING I cannot understand, also where the money comes from to give dividends thank you for you article DAVE UK
Thanks for your comment Dave; and for your observation about the UK100 vs. DAX. I’ll try to say something more about this subject in a future article.