Dividends are a key component of investing, offering income to shareholders while also influencing stock prices and index levels. But when it comes to spread betting, dividends work a little differently—and the nuances can make all the difference in your trading strategy.
In a previous article, reader David Brown raised a great question: why are dividends paid on UK 100 rolling spread bets but not on DAX 30 rolling spread bets? Let’s unpack this, along with other important points about how dividends affect spread betting.
Why the DAX 30 Handles Dividends Differently
The DAX 30 is a total return index, which means its value already reflects the dividends of its constituent stocks. Instead of paying out a separate dividend adjustment to spread bettors, the index price is adjusted directly to account for dividends.
In contrast, spread betting accounts do credit dividends for the individual constituent stocks of the DAX 30, much like they do for stocks in the FTSE 100. This difference in methodology is one of the quirks of spread betting on indices, and knowing how it works can help you avoid surprises.
Rolling vs. Quarterly Spread Bets: The Dividend Difference
The way dividends are accounted for also varies between rolling spread bets and quarterly spread bets. Here’s how it works:
- Rolling Spread Bets: These reflect dividend adjustments on the ex-dividend date, meaning you’ll see a credit (or deduction if you’re short) in your account on that day.
- Quarterly Spread Bets: Dividends are already baked into the price. As a result, you won’t receive a separate dividend adjustment.
If you’re looking to trade around dividends, rolling spread bets are the way to go, as they give you immediate visibility and control over the adjustment.
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) Sterling Overnight Index Average (SONIA)-2% to short traders while taking in (for example) SONIA + 2% from long traders. Notice that in this equation, a low SONIA rate (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.
Final Thoughts: Dividends Aren’t Everything
Dividends can be a nice bonus for spread bettors, but they shouldn’t dominate your trading strategy. Whether you’re trading for income or growth, understanding how dividends are handled in spread betting is crucial for managing expectations and making informed decisions.
And for those traditional investors out there, it’s worth considering how spread betting’s tax and cost advantages could complement your long-term strategy. Just remember: there’s no such thing as a free lunch—but with a little know-how, you can make dividends work in your favor.
