Dividend Future

Dividend Future

Credit: Scripbox

For the income investor who seeks yield from dividend stocks and fixed-income investments, there's an increasingly popular financial instrument that effectively marries the best of both worlds: dividend futures. Here's what dividend future means!

DEFINITION

• A dividend future is a forward contract traded on an exchange

• It allows investors to take a long or short position on the amount of dividends paid by a company to its shareholders for a specific maturity date in the future

• Dividend futures are available in various financial markets, including the London Stock Exchange (LSE)

• These derivatives function much like zero coupon bonds, in which buyers pay a discounted price today for the potential of a full dividend payment sometime in the future

• If the company in question fulfills or exceeds its promise to pay a certain dividend, the investor will earn the difference between the purchase price and the ultimate payment

• Dividend futures enable you to trade dividends independently of the underlying stock

• Dividend futures are usually traded in batches of 100 or 1,000

• The profit or loss you make depends on the difference between the price you bought or sold the future and the settlement price

DIVIDEND VS STOCK PRICES

• Dividend payments have a closer correlation to company earnings than price movements in the stock, giving an edge to investors who believe they can forecast earnings growth

• If one can forecast dividend payments, you are guaranteed to make money

• Stock prices, on the other hand, are based on sentiment as well as performance