Dividends are not payable on index trades as you do not own the underlying constituent stocks. However, the economic impact of dividends is accounted for through dividend adjustments as explained below.
Constituent stocks of an index will periodically pay dividends to shareholders. When they do, this impacts the overall value of the index causing it to drop by a certain amount. We may make dividend adjustments if a dividend is scheduled to be paid to the holders of the underlying instrument. These adjustments are normally made on the ex-dividend date.
When there’s a dividend payment this is normally reflected in the index CFD price. If you have an open position at the time of a dividend adjustment, we’ll ensure that there is no material impact on you by either crediting or debiting your account with the same amount that your unrealized profit and loss has been impacted.
Long position example
Let’s assume UK100 (FTSE) is trading at 7,167.95 GBP.
If a client is long 20 units of UK 100 and a stock in the index pays out a dividend that equates to 5 index points.
The index value would drop to 7162.95 GBP.
The dividend adjustment would be
= index dividend points drop X no. of units of the index CFD held
= 5 X 20 = 100 GBP
This will be credited to the client's account post home currency conversion.
Short position example
Let’s assume US SPX 500 (S&P500) is trading at 2,989.69 USD.
If a client is short 10 units and a stock in the index pays out a dividend that equates to 0.890 index points.
The dividend adjustment would be
= Index dividend points drop X no. of units of the index CFD held
= 0.890 X 10 = 8.90 USD
This will be debited from client's account post home currency conversion.
Clients will be able to see OANDA's dividend adjustments in their Transaction History and Statements.
How do drop points get calculated from stock dividends?
Let’s assume US Index has a price of 1,000 USD, a constituent stock “Alpha” has a price of $100 USD and issues a $2.00 USD Dividend. Alpha has a weighting of 5% on the US Index.
If the Index is priced at 1,000 USD, then a 5% constituent weighting represents 50 points of the index (1000 * 5% = 50). While a dividend of $2.00 would be a drop of 2% of the value in constituent stock (98-100/100*100=-2%). The equivalent drop points applied to the index for the dividend paid on the constituent stock would therefore be (50 points * 2% = 1) or 1 drop point.
This means we’d have to apply a dividend adjustment of 1 point to all holders of the index. Thus, for every CFD held, long positions would be credited 1 USD, while short positions would be charged 1 USD.