Some ways to trade around the dividend date:
Using shares:
By using the shares themselves you can benefit from the share price rise before exdiv date, the dividends received and the franking credits, as well as any share price gains after the ex dividend date. The downside is that more capital is tied up and at risk than by using other methods.
Using warrants:
Warrants can have all the benefits of the share ownership but using less capital and also having less capital at risk. If buying warrants to receive the dividends, be sure to check the terms of the warrant, including the warrant/share conversion ratio. The downside of warrants includes the time decay of their value (which can be minimised by using longer dated warrants) and lack of liquidity at times.
Using options:
Options do not allow you to collect the dividend and franking credits unless you exercise the call options (effectively buying the shares – see above). Options can be used to benefit from the gains in share prices prior to and after ex div date. Advantages include the relatively small amount of capital required, but the disadvantages include the time decay of options value and the lack of liquidity in the Australian options market for most stocks.
Using CFDs:
CFDs allow you to benefit from share price gains (and falls) but are adjusted for dividend amounts. Different CFD providers treat franking credits differently, but generally they do not pass on any of the franking credits benefits to either short or long CFD holders – always check how your CFD provider treats dividend and franking credits before holding any position over ex div date.
The advantages of CFDs include a relatively small amount of capital tied up to get a large exposure to a stock, but this leverage can also be a big disadvantage if a share price moves against you – your total risk is the total value of the position, not just the amount of capital used to open the position. Stop losses and guaranteed stop losses (GSLs) can be used to lessen the risk. GSLs cost a little more, but can be an important tool to protect your capital – check with your CFD providers to see if and how they can be used. If they do not offer GSLs, find another CFD provider. Our preferred CFD provider is disclosed here.
How to choose which of the above is best for you and at what times is up to your own personal discretion, but we will have more information on the site soon to help you make informed decisions.
If you plan to receive franking credits be aware of the 45 day rule for taxation purposes. Click here for the ATO description of the 45 day rule.