How do you calculate dividend payouts on equities and indices?

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A dividend is a share of profits and retained earnings that a company pays out to its shareholders. Many companies pay regular dividends to their shareholders, often on an annual, semi-annual or quarterly basis. It is also possible for companies to pay ad-hoc dividends.

Companies declare the dividend amount per share in advance of ex-date, record date and the payment date.

With funds leaving the company, the result of a dividend payment (all other things being equal) is that the share price falls by the dividend amount. The date that the dividend is removed from the share price, and therefore the date that open positions on a CFD or spread betting account are impacted, is known as the ex-dividend date.

However, as dividends are pre-released information, they are not a tradeable event on a CFD or spread betting account. To negate the impact, an equal and opposite adjustment is applied to any open positions held through the ex-dividend date. It is also important to note that, as indices consist of companies that pay dividends, they will also be subject to dividend adjustments.

As any long positions held when the underlying stock or index goes ex-dividend would see a negative impact on any running P&L, we credit the account with an amount equivalent to the amount of the dividend. It will be adjusted, if necessary, for taxation.

Conversely, any short positions held on an instrument when the underlying stock goes ex-dividend, would have a debit applied to the account to negate the improvement to the P&L from this non-tradeable event.

To calculate the adjustment, we simply multiply the size of the position by the dividend amount.

Examples below:

Spread bet
US Wall Street 30 has a dividend of 10 points.

A long position (held through the ex-date) of £2 per point on a spread betting account would receive a credit of £20. This is calculated by multiplying the position size (£2) by the dividend amount (10 pts). This negates the 10 point fall in the index, which would see the P&L of the position fall by £20.

A short position of the same size (£2 per point) would be debited £20.

Apple Inc pays a dividend of $0.25 per share.

A 10 shares long position (held through the ex-date) would receive a credit of $2.50, adjusted for taxation.

A short position of the same size would be debited by $2.50. This negates the improvement in the P&L as a result of the dividend.

You can track forthcoming dividend adjustments on indices here.

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