When traders start talking about their CFD trading strategies the conversation inevitably gets to ‘can you trade CFDs for dividends?’. The answer to this simple question is a resounding yes and today we’ll look at the TOP 5 questions traders ask about CFDs and dividends:
First I will point out that CFD traders are entitled to dividends just like those who are trading the stock so long as you are in the CFD prior to the ex-dividend date. If you own the stock long, then you will receive a credit equal to the amount of the dividend and if you are short then you will receive a debit to the amount of the dividend.
In order to receive a credit for a CFD dividend, you must own the CFD prior to the ex-dividend date. For example if the stock you were own went ex-dividend on Monday, then you will need to have bought in at least on Friday to earn the dividend credit.
Always keep in mind that if you are short (attempting to profit by the position falling) then you will owe (received a debit) of the amount of the dividend.
The dividend you receive (or lose) will be credited (or debited) to your account and most CFD brokers will pay that on the same day it goes ex-dividend.
2. How long do you have to own a CFD/stock for to get a dividend?
You must be in the position prior to the ex-dividend date. That is the only date that matters.
3. Are there any franking credits when trading a CFD for a dividend?
CFDs do not receive any franking credits that you might be used to when trading normal ASX stocks. In fact, on the ASX stock market you have to have bought in at least 45 days prior to the ex-dividend date to be entitled to the full franking credits.
4. What happens if I am short selling, do I owe the dividend?
If you are short selling (profiting from the position when it falls in value) and you are short prior to the ex-dividend date, then you will owe the dividend. Some CFD brokers state in their PDS that franking credits on short positions ‘may’ be debited from your account as well as the dividend itself. This usually does not happen however.
5. What usually happens when a stock pays a dividend?
A good example is AMP Limited is going ex-dividend on the 15th of September 2008 and it will be paying a 24 cent dividend. The likelihood is that AMP will fall the price of the dividend on the day it goes ex-dividend but if you are long then you will also receive that 24 cents as a credit to your account.
If you were short prior to AMP going ex-dividend then you will likely get a capital appreciation because it will fall 24 cents but you will also owe the 24 cent dividend.
So basically when a ASX stock pays a dividend and you are in the CFD, the stock will fall the amount of the dividend and you will either owe or get a credit of the exact same amount as that dividend. All going well, you should come out square. What happens next is a total lottery as the traders buy or sell the stock accordingly.