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- In finance, a dividend future is an exchange-traded derivative contract that allows investors to take positions on future dividend payments. Dividend futures can be on a single company, a basket of companies, or on an Equity index. They settle on the amount of dividend paid by the company, the basket of companies, or the index during the period of the contract. For example, if company A pays a quarterly dividend of $0.25 in 2012. If an investor buys a 2012 dividend future, the of the future will be equal to 4 x $0.25 = $1 per contract. The profit or loss the investor makes depends on the difference between the price they bought or sold the future and the settlement price. For instance, if the investor bought the 2012 dividend future at $0.90, he would make a profit of $0.10 per contract.Most dividend futures trades occur before the dividend is known, hence allowing investors to go "long" or "short" the future dividend payment. The "buyer" of the contract, is said to be "long", and the "seller" of the contract, is said to be "short". The terminology reflects the expectations of the parties: the buyer thinks the dividend is going to increase, while the seller thinks it will decrease. The contract itself costs nothing to enter; the buy/sell terminology is a linguistic convenience reflecting the position each party is taking (long or short). Dividend futures are usually traded in increments/lots/batches of 100 or 1000 and have a 1-year time span. When purchased, no transmission of share rights or dividends occurs. Being futures contracts, they are traded on margin, thus offering leverage, and are not subject to the taxes equity holders must pay when they receive dividend distribution on their stocks. They are traded in various financial markets, mainly in Europe, and Asia, and several Blue chip companies and are available with maturities going as long as 5 years for Equities and 10 years for Equity indices. (en)
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