Spread Bettors: Don’t Forget the Dividends!
Oct 28, 2011 at 9:57 am in Tips and Strategies by
In a previous article I pointed out the fact that spread bets pay dividends (or make corresponding adjustments or credits) just as regular shareholdings do. I suggested that on longer-term position trades these dividend receipts might go some way to offsetting the daily financing charges that are levied by the spread betting companies on rolling spread bets.
Theory is all very well, but here is a concrete example:
On 26 October I received a ‘interim’ dividend credit of £1.60 on my long £1-per-point Marshalls plc spread bet. Since this was an ‘interim’ dividend, there’s a good chance I will receive twice as much again as a dividend credit in six months time if I’m still holding this position. With the Marshalls share price sitting at about 90p-per-share, my £1-per-point position is equivalent to a £90 investment, therefore the total anticipated annual dividend credit of £4.80 would be equivalent to a rate of return of 5.3%. This ‘dividend yield’ is better than I would get by depositing my £90 in the bank, and it’s on top of any capital appreciation I might also enjoy if the share price goes up.
This talk of ‘dividend yield’ sounds a bit too much like investor-speak for us spread bettors, so let’s return to the fact that this is a spread bet by considering the effect of leverage and rolling charges.
A Leveraged Return
Spread bets are leveraged, which means you don’t need to deposit the full amount to cover the size of your bet. This additional firepower — which is effectively borrowed money — is what you get in exchange for the daily financing charges that I will discuss shortly.
While my £1-per-point spread bet on this 90p stock is equivalent to a £90 ‘investment’, to establish such a position requires a margin deposit of typically only £25. An anticipated £4.80 dividend return on my £25 spread bet ‘investment’ gives a leveraged-up dividend yield of almost 20%. Now we talking, and this is in addition to any capital appreciation from the rising share price.
Rolling, Rolling, Rolling
This particular rolling spread bet is costing me 1p-per-day in daily ‘financing’ charges. In the eight days that I held the position before the dividend was credited, I incurred charges of 8p compared with my receipt of £1.60. This bet has more than “paid for itself”, but it’s unfair of me to gloat about capturing the dividend so soon after opening my position. So lets look at it another way:
My £1.60 dividend receipt is enough to finance this position at 1p-per-day for 160 days. The anticipated total dividend credit of £4.80 for the year would be enough to finance the position for 480 days, so I could capture a small surplus over the 365-day year. Yes, this bet could certainly pay for itself in the same way that a buy-to-let property would pay for itself if you took more in rent than you paid in mortgage interest.
With this spread bet also in profit, and now protected by my better-than-break-even stop order, I just can’t lose.
Tony Loton is a private trader, and author of the book “Position Trading” (Second Edition) published by LOTONtech.