Do you receive dividend adjustments when long equity forward contracts?

[herdassistance]

Hi,

Have asked IG a couple of times and been told you do not receive dividend adjustments on forward contracts on individual equities.

I still have doubts about this. The pricing of the quarterly contracts are higher than DFB, even for equities with high dividends.  They are also very similar regardless of size of dividend.  The terms and conditions also imply dividend adjustments are made unless the contract is clear they are not.

Can someone who has held these confirm whether dividend adjustments are made?  Or could IG clarify if there is a representative on the forum?

Thank you!

[herdassistance]

In case anyone is searching for this topic I bought one fwd equity as a test and did receive a dividend adjustment on the date it went ex-dividend:

John Laing Environmental Assets Group LimitedJUN-21

04/03/21
DIVIDEND
Adjustment for dividend in John Laing Environmental Assets Group Limited
£1.69

I'm going to assume you do get dividend adjustments but will be careful with size until I've seen a few more be paid.

If anyone from IG could confirm that dividend adjustments are paid for equity and ETF forwards that would be reassuring.

[larlar9000]

IG's dividend adjust policy is a bit opaque to me.

 

If, say AVIVA announces a dividend of 14p a share, and I am long £10 dfb what would my dividend adjustment be. Would I receive the full dividend? £140?

And would the price quoted by ig index to close  the position be reduced by the dividend amount or would it simply reflect the trading price the following day? 

[Stonk]

On 09/03/2021 at 18:30, herdassistance said:

In case anyone is searching for this topic I bought one fwd equity as a test and did receive a dividend adjustment on the date it went ex-dividend:

John Laing Environmental Assets Group LimitedJUN-21

04/03/21
DIVIDEND
Adjustment for dividend in John Laing Environmental Assets Group Limited
£1.69

I'm going to assume you do get dividend adjustments but will be careful with size until I've seen a few more be paid.

If anyone from IG could confirm that dividend adjustments are paid for equity and ETF forwards that would be reassuring.

 

This confirms my belief that dividend adjustments would be made on equity forwards.  I will find out more and report back when one of mine goes ex-div, but none are imminent.

The amount you have been credited is odd though.  JLG are paying 7.82p/share, so £1.69 would be the dividend on 21.6 shares.

If dividend adjustments were NOT paid, then surely there would be (on average) easy money to be made by going short the nearest-dated forward of any equity with a dividend larger than the spread thereon at 16:29 the day before it trades ex-div, then closing the position the next day.

 

 

[herdassistance]

On 14/03/2021 at 23:23, Stonk said:

 

This confirms my belief that dividend adjustments would be made on equity forwards.  I will find out more and report back when one of mine goes ex-div, but none are imminent.

The amount you have been credited is odd though.  JLG are paying 7.82p/share, so £1.69 would be the dividend on 21.6 shares.

If dividend adjustments were NOT paid, then surely there would be (on average) easy money to be made by going short the nearest-dated forward of any equity with a dividend larger than the spread thereon at 16:29 the day before it trades ex-div, then closing the position the next day.

 

 

Good to hear someone was confused in the same way!

The share I bought was JLEN rather than JLG, to make the test as cheap as possible.  The dividend adjustment was exactly in line with the declared dividend:

"Dividend

The Company announces a quarterly interim dividend of 1.69 pence per share for the quarter ended 31 December 2020, in line with the dividend target of 6.76p per share for the year to 31 March 2021¹, as set out in the 2020 Annual Report. The Company reiterates its expectation of meeting that target.

Dividend Timetable

Ex-dividend date 4 March 2021

Record date 5 March 2021

Payment date 26 March 2021"

I was pleased the full dividend was applied - I thought some could be retained as a tax equivalent from what I had read elsewhere.  So better than I expected.

I'm hoping distributing ETFs work in the same way, which is mainly what I plan to hold.

[herdassistance]

On 12/03/2021 at 14:28, larlar9000 said:

IG's dividend adjust policy is a bit opaque to me.

 

If, say AVIVA announces a dividend of 14p a share, and I am long £10 dfb what would my dividend adjustment be. Would I receive the full dividend? £140?

And would the price quoted by ig index to close  the position be reduced by the dividend amount or would it simply reflect the trading price the following day? 

Yes it feels a bit opaque - could do with some better help guides written for this sort of thing.

If it followed the example from my JLEN test then it's the full gross amount which feels surprisingly good.  I'd expect withholding tax to be deducted for countries that apply that though.  I'd have thought the IG price would follow the market so should open lower in theory.

But I'm returning to spread betting after a long time away, and I don't know for sure - perhaps someone who did could comment.

[Stonk]

I have just done a similar test, with results that agree with yours.

M&G PLC was going ex-div today for a juicy 12.23p, so yesterday I bought GBP0.25 per point (25 shares worth) of the June forward.  Sure enough, sometime before markets opened this morning I was credited with the full dividend amount of 306p.  As expected, the spot and forward prices opened with a drop of roughly the dividend amount, with the forward price staying at the same differential from the spot price as it was yesterday.  All good.

Next week, if I can find a sufficiently cheap share paying a noticeable dividend I will test taking a short forward position to verify that dividends are debited in that case.

City Index are clearer than IG in their documentation that dividend adjustments are made to all equity positions, spot or forward.  City Index also state that the 10% dividend tax is withheld, although I can't reason out why that is necessary.  It feels like it would just complicate the user's tax affairs: if your personal circumstances are such that your P&L is taxable, then some of it needs declaring, while some of it has been dealt with at source.

 

Next question!  What determines the price upon which forwards are based?  Obviously the longer the forward the wider the spread.  But, also, longer forwards tend to have higher mid prices.  It might be something to do with the general expectation of increasing prices and the risk-free interest rate, but then I would expect the differential to be consistent across all shares, and it is not.  I wondered whether IG is building some of their own opinion into this differential, on a share-by-share basis.  I'm pretty sure last week I saw a couple of shares with forward prices at a discount to spot prices.  That might have been a glitch because I cannot find it today (note to self: exploit this when you see it in future!).

Just to add another spanner in, City Index's forwards are priced with broadly similar spread but significantly higher mid prices.  For example, take BT PLC.  On IG, the June forward is priced off spot +0.21p, and the September forward off spot +0.40p.  On City Index, they are +0.94p and +1.91p respectively.