Playing the Market

How does a pividend play work? Mainly it involves understanding how companies pay out dividends. Every shareholder is entitled to receive a dividend (if the company pays them out), as long as they purchased the security prior to a cut-off date called ex-dividend date (or ex-div).

Both direct shareholders as well investors who purchased CFDs can receive dividends, with the key difference being that owners of CFDs are paid dividends on the ex-dividend date, while owners of shares are typically paid several weeks later.

In a perfect-world scenario, the value of the equity should decrease on the ex-dividend date by the amount of the dividend that was paid out, to compensate for the transfer of liquid assets away from the company. However, because financial markets are not perfectly efficient, sometimes the share price will decrease by less than the full amount of the dividend (or, sometimes, by more) due to other commercial and market factors. This creates an arbitrage opportunity that we call a dividend Play. The key to a dividend play is to spot the moment when the share price to expected to decrease less than the amount of the dividend (or to quickly recover to original levels) and to capture the difference as profit.

An investor can purchase CFDs before the ex-dividend date, receive the value of the dividend, then hold the shares for a short duration while their value recovers. After a few days, they will sell the shares and earn both the value of the dividend as well as the difference between prices when they bought and sold the security.

To benefit from a dividend play, investors can hold both long and short positions, with the difference being that in case of a long position, the value of the dividend is credited to their account, while in case of a short position, the value of the dividend is taken out of their account.

Mastering the Research

Sounds simple enough? dividend Plays can be a very straight-forward investment strategy, but to truly master this approach, an intelligent investor will be looking for an edge over other market participants. This edge can lie in understanding when ex-dividend dates occur, how the value of the dividend is calculated, how quickly the shares recover and which companies offer the best targets for dividend Plays.

Here is a sample of select UK 100 companies that have recently paid out dividends or will pay them out shortly, with the key metrics that can help an intelligent investor take advantage of dividend Play opportunities. The examined dataset spans a 10-year period from May 2008 to May 2018 and studies the average number of days that it takes for a share price to recover after an ex-dividend date to bring the investor into a net profitable position (“in the money”)

With hundreds of companies trading on the London Stock Exchanges, comprehensive in-depth research into dividend Plays can be a daunting proposition, which is why Accendo Markets specialises in providing an investment support structure for our clients to help them understand the market and spot potential dividend Play opportunities long before they emerge.

Please contact us for a full breakdown of the data.