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Spread Betting for Dividends: Too Good To Be True?

Oct 28, 2011 at 10:45 am in Tips and Strategies by

In my previous article I painted a rather rosy picture of how spread bettors can hold on to trades potentially forever, capturing a stream of dividends along the way just like ‘investors’ do.

With my example equity spread bet on Marshalls plc potentially more than paying for its own upkeep thanks to dividend receipts offsetting the rolling financing charges, and with it showing some capital appreciation to boot, it looked rather too good to be true. So is it?

More where that one came from

Marshalls plc was not the only example I could have used. On the day that I received the dividend credit, I also received dividend credits of £0.22 and £0.43 on Thorntons and Corin Group £1-per-point positions respectively.

The bad news is that while these equity positions may also be paying for themselves in terms dividend income vs financing charges, they are both currently showing capital losses of 10% since I established my positions.

Whether spread betting or investing conventionally, I don’t believe in buying and blindly holding for a dividend income stream in the face of falling prices, so there’s a good chance I’ll soon stop the rot by stopping out.

Dividends are just a bonus

What I’m really looking for is massive and ideally rapid capital appreciation on my spread bet equity positions. I’ll keep holding while the price keeps rising or while it at least stays level while those dividends roll in, but the dividends are just a bonus that helps my longer-term positions pay there way.

It’s lucky that I treat any dividend income stream as just a bonus because, as you know…

Not all stocks pay dividends

It goes without saying, I know. But I need to say it because the only way to determine if my spread bet portfolio as a whole is paying for itself through dividend income is to compare the entire dividend income stream to the total daily financing charges.

Unless you construct a spread bet portfolio entirely from high-yielding equities — which would be an interesting experiment, but fraught with danger — you will find (like I do) that dividends do not provide your portfolio with an entirely ‘free lunch’. But they help.

No free lunch, but a viable alternative

I realise that this style of spread betting is somewhat different from what you might have been doing to date, and rather different from what the spread betting companies might encourage you to do. There’s no free lunch, but this approach does present a viable alternative for those spread bettors who have ‘investor’ tendencies. It also presents a viable alternative for traditional investors who want to benefit from the tax-free profits and zero dealing fees that spread bets offer… but without throwing out their existing investment strategies.

Tony Loton is a private trader, and author of the book “Position Trading” (Second Edition) published by LOTONtech.

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