How do dividends impact my trading positions?
Dividends – or payments given by companies to shareholders to reward them for the risk of holding their shares – are a big attraction for investors holding stocks, particularly income investors looking for regular cash payments.
The pros of dividends are obvious. FTSE 100 companies were on course to pay a record £88.6 billion in dividends last year, according to the Mail on Sunday. That’s almost double the amount shareholders received before the financial crisis 10 years ago. Royal Dutch Shell was top of the list. It was expected pay dividends of more than £11 billion in 2018, followed by HSBC, £7.6 billion, and BP, £6 billion, in third place.
You have to remember, though, that dividend payments are variable. They might be raised, reduced or stopped altogether at any given time, depending on the company’s performance or dividend policy.
Dividend changes also affect share prices (a phenomenon behind the appeal of the dividend capture strategy among traders). For example, when a company issues a dividend, its share price will usually drop by the amount of the expected dividend.
If you’re trading CFDs or spread betting with InterTrader you’re not making a physical purchase of a company’s stock, so you won’t receive actual dividend payments. However, if you’ve a trading position in any share that is affected by a dividend announcement we’ll adjust your account accordingly.
The all-important ex-dividend date
For example, say a company announces that its shareholders will receive dividends. It will declare an ex-dividend date, which is the cut-off point for anyone wanting to buy stock and be eligible, and a payment date.
If you have an open position on this stock on the ex-dividend date, we will either credit or debit your account depending on whether you are long or short, to reflect the change in share price.
Our adjustment on long positions will include a 20% ‘haircut’ to cover tax and other charges.
Let’s assume you are long £10/point (the equivalent of 1000 shares) in a company that announces a dividend to shareholders of 10p per share. Here we will credit your account with (10p x 1000) x 80%, so £80. If you are short £10/point we will debit 10p x 1000, or £100, from your account.
Trades on indices are also affected
A company’s dividend announcement will also affect the value of the index it belongs to.
For example, UK motorists’ organisation AA announced a dividend on 26 September 2018 with the ex-dividend date set at 4 October. Shareholders were paid a dividend of 0.6p per share on 9 November 2018.
Meanwhile, the UK’s largest supermarket Tesco also raised its interim dividend to 1.67p per share from 1.00p a year earlier, when it resumed dividend payments following a hiatus that lasted over two years, after its second-quarter pre-tax profits rose 2%.
AA and Tesco are listed on the FTSE 100. Therefore, any change in value for these companies will change the overall value of the index proportionately.
If you have an open position on UK 100, we will adjust your account to reflect the resulting change in value (in full, without any deductions) on the respective ex-dividend dates. Again, this will either be a credit on long positions or a debit on short positions.
Whenever dividends change, so will your position
A company might cut dividends or scrap them altogether. US conglomerate General Electric, for example, once famed for its reliable shareholder payments, cut its dividend in half last year amid poor performance. Shareholders now fear they may stop dividend payments altogether.
A company may also make other specific payments to shareholders in addition to scheduled dividends. Whenever a company you are trading in changes its dividend or makes a payment to its shareholders, we will adjust your position accordingly. We will do the same if you hold a position in the relevant index.
You should under no circumstances consider the information and comments provided as an offer or solicitation to invest. This is not investment advice. The information provided is believed to be accurate at the date the information is produced.