Response to a Reader Question (about Dividends on Spread Bets)

Look back at my article Position Trading #7: Dividends and you will see that reader David Brown commented that he didn’t understand why dividends are paid out on UK 100 rolling spread bets but not on DAX 30 rolling spread bets. As well as answering that question here, it is worth re-iterating some of the other important points about dividends on spread bets.

Accounting for Dividends on the DAX 30

Straight from the horse’s mouth at Capital Spreads comes the answer that the DAX30 index is a total return index, which means that the price of the instrument itself is adjusted rather than a separate dividend credit being made to the client’s account. Note that constituent stocks of the DAX 30 should have their dividends credited to the client’s spread betting account as normal just like the dividends from FTSE 100 stocks do.

Dividends on Rolling vs. Quarterly Spread Bets

The subject of how dividends may be accounted for on different instruments also brings us nicely to rolling spread bets vs. quarterly spread bets. As explained in an FAQs feature, quarterly spread bets already have any expected dividend priced in, so you won’t receive a separate dividend credit on the ex-dividend date as you would with a rolling spread bet.

The Discounted Dividend

Spread betting companies tend to pay 80%-90% of the declared dividend, and they justify this (among other reasons) as a measure to prevent clients from pulling a tax-avoidance trick by selling an ordinary stock holding, taking out a spread bet to capture the dividend (without paying income tax), and then re-establishing the original stock position.

The Long and Short of Spread Bet Dividends

Did you know that if you hold a short position in a stock or an index such as the UK 100, you have to pay the dividend (i.e. have an equivalent amount deducted from your account) on the ex-dividend date for the benefit of those who will receive it? That’s all fine and above board, but you will be interested to know that you pay 100% of the dividend on a short position compared with receiving 80%-90% of the dividend on a long position — so it may appear as though the spread betting company simply pockets the difference.

In the same spirit, note that whereas you pay overnight financing charges on long rolling spread bets, in theory you can receive financing charges on short positions, and again the spread betting company pockets the difference by paying out (for example) LIBOR -2% to short traders while taking in (for example) LIBOR + 2% from long traders. Notice that in this equation, a low LIBOR (at say 1%) minus 2% would yield a figure of -1% as the financing received by short traders; so in a low interest rate environment even short spread bettors will pay financing charges to hold their positions.

When Dividends are Paid

Unlike on an ordinary stock position where a dividend becomes payable if you hold the stock at the ex-dividend date, but is not paid until some weeks later, on a spread bet the dividend adjustment is made immediately at the ex-dividend date.

No Free Lunch when Capturing Dividends

Many novice spread bettors and stock traders believe that they can get a free lunch by taking a position immediately before the ex-dividend date, banking (or becoming eligible for) the dividend, and then closing the position the next day. What they fail to realise, and it may be hard to spot when prices are fluctuating, is that when a company pays out a dividend of (let’s say) 5% its share price falls by the same 5% to reflect the fact that no new money has been created and subsequent purchasers of the stock will not receive the benefit of the dividend.

Spread Betting for Dividend Income

Since it is not possible to capture dividends in the short term — and if you found a way, the spread betting companies would try to stop you — the prospect of receiving dividends on spread bet positions will be of more interest to longer-term position traders and traditional investors.

While personally I would not “invest” solely for the income derived from high dividend yield while ignoring any adverse price action, it sometimes surprises me that more traditional investors do not practice their buy-and-hold techniques in the tax-friendly and commission-free environment of a spread betting account.

Tony Loton is a private trader, and author of the book “Position Trading” (Second Edition) published by LOTONtech.

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