Dividend swaps

By THIS IS MONEY
Updated:

 

The Daily Mail City team explains what dividend swaps are - a contract which allows you to bet on future company payouts.

Eh?

It's very simple really. Dividend swaps are a means of betting on the future generosity of a company.

Only you don't have to buy the shares or a basket of stocks to receive the dividend payout. Instead you take out a contract.

On who?

No, you nugget, not that sort of contract. One that allows you to buy or sell the underlying dividend.

Sounds easy, what's the catch?

Recession, record volatility on the markets and dramatic downturn in company earnings have made the business of predicting dividend payouts very risky and sometimes costly business.

Just look at the builders, pub companies and retailers that have either cut their cash returns to investors or scrapped them completely.

Dividends are best swapped by professional investors, not least because hedge funds tend to specialise in trading these rather exotic instruments. But even these wily investors have had their fingers burned of late.

Why are we interested?

Despite the recent turmoil, the dividend swaps market is still seen as a decent barometer of the financial health of companies - even the Bank of England uses it as a reference point.

Currently traders are predicting a sharp deterioration in the cash splashed by the nation's big listed companies this year.

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