A common question people ask is ‘do I receive dividends when buying CFDs?’ The answer to this question is simple, ‘yes’. However, there are a few things to be aware of as CFDs are a derivative contract between the CFD provider and the buyer or seller of the CFD, you do not own the underlying share over which the CFD is based, this means that the treatment of dividends may be a little different to what you may have become accustomed to when trading shares.
Unlike ordinary shares the dividends received by the holder of a long CFD position do not have any franking credits attached to them. A franking credit is a tax credit provided by the company with the dividend when it is paid to shareholders. Essentially the company over which the CFD is based has paid a portion of tax on behalf of its shareholders. Fully franked dividends have a 30% tax credit attached. The concept of franking credits is peculiar to Australian companies.
When buying shares it is important to understand that in order to be entitled to the dividend franking credits it is necessary to own the shares for 47 days which includes the dividend date. The formal requirement is 45 days but this doesn’t include the days the shares are bought or sold which increases the holding period by an extra two days. Despite franking credits not being attached to CFDs most CFD traders are not concerned as most are not long term investors and do not hold their CFD positions open long enough to gain any real benefit.
CFD traders can sell a CFD just as easily as they can buy a CFD, selling a CFD without holding a long open position is known as short selling. It is important to note that there is an obligation to pay a dividend to the CFD provider when a short sold CFD position is held over the ex-date. The ex-date is the date on which the seller, and not the buyer, of a stock is entitled to the dividend.
It is important to be aware that when paying the dividend on a short sold position you may also be liable to pay the franked component of the dividend. The reason you may be liable to pay the franked component in addition to the declared dividend amount is because when your CFD provider hedges your short position in the market they were required to borrow stock from an owner of the shares, it is possible that they borrowed the stock to cover your short position from another Australian resident who is also entitled to the franking credit. In most cases your CFD provider will attempt to secure stock from offshore where the owners of the stock have no use for franking credits. You should always check with your CFD provider prior to short selling a CFD over dividend periods as you may find that you are also liable to pay the franked component of the dividend.
There are a number of trading strategies CFD traders can employ over dividend periods, one of these strategies is known as dividend stripping. Dividend stripping is the purchase of shares prior to a dividend being paid, and the sale of those shares after that payment. Understanding how you can trade CFDs around dividend periods is important when developing your CFD trading strategies.
To find out more about CFD trading you can download our free CFD Guide.