A few weeks back I wrote about UK 100 bluechip companies paying high dividends (yields of up to 12%) and those dividends most healthily covered by company profits (up to 17x). A combination of the two metrics can help investors filter for companies least likely to cut dividends in times of trouble, and thus the dividends most likely to be paid sustainably, helping investors lock in the bank- and inflation-busting income they so desire.

This week I’d like to look at another aspect of dividends: the potential arbitrage on offer from CFDs receiving dividends earlier than traditional shares.

It has long been accepted that share prices have a tendency (no guarantee) to rally between two key dividend dates; the ex-dividend date (usually a Thursday) and payment date. On the ex-div date the shares no longer trade with the right to receive the forthcoming dividend, so the price adjusts downwards in-line with the pending cash outflow from the company.

The assumed tendency for the share price to recover between the ex-div date and the payment date stems from belief that bargain hunters will look for the gap that has formed on the price chart to be closed, in turn based on the expectation that traditional shareholders will eventually reinvest their dividends back into those same shares, bidding up the price. Shareholders will, of course, see the value of their holdings temporarily fall on the ex-div date, but will ultimately be made good once the dividend is paid. But how long must they wait?

The list of companies going ex-dividend next week (paying CFD holders) suggests receipt, on average, 24 trading days earlier than those using traditional shares. The delay ranges from 12 to 42 days; a whole 5 trading weeks; 10% of the trading year. They say it pays to be patient, but that’s an awful lot of waiting around for traditional shareholders. Economists call it opportunity cost. Investors could go out and buy more shares on the ex-div date, looking to capitalise on any share price recovery, but that’d require more funds. And you’d have to assume they’re already fully invested in shares.

CFDs to the rescue! These can be use by both investors and speculators. The former could open an equivalent position (requiring only a 20% deposit) the day before the shares go ex-dividend, receive the full dividend the next morning (assume offset by corresponding share price drop; net-net break-even) and be in a position to capitalise on any share price recovery that may ensue. Should the share price recover all the way to their entry price, the dividend is all profit. This is arbitrage opportunity #1.

Remember share prices factor in all available market information. Should there be good or bad news that also affects the company on the ex-div date, the shares may adjust by more or less than the dividend amount. The shares could drop by much more, perhaps not as much, they may even go up. Herein lies arbitrage opportunity #2.

If the shares adjust for a 10p dividend and only drop by 5p on the ex-dividend date, your position would be 5p in profit. If the shares go up 1p, the position would be 10p in profit. To remain balanced, should the shares fall by 15p, the position would be net 5p down. While arbitrage opportunity #1 is a bit more long-term (days, maybe weeks), arbitrage opportunity 2 could last as little as a few minutes, traders buying the shares at 4.25pm just before Wednesday’s market close and selling them at 8.05am just after Thursday’s open.

At Accendo Markets we provide up-to-date information about all upcoming dividends; when, how much, what yield, how many days earlier than shares. We also follow up afterwards with analysis of where shares are in terms of recovering from their most recent adjustments. It’s still early, but several of yesterday’s dividend payers have already recovered by more than the value of the dividend, the same being true of the last two weeks. To know who might offer the next arbitrage opportunity, get access to our award-winning research now.

Enjoy the weekend. I’ll be watching what is already an exciting Ryder Cup.

Mike van Dulken, Head of Research, 28 Sept 2018