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Case study
Jim has heard about trading shares and warrants for dividends and is interested in using CFDs for leverage and taking advantage of dividends on offer. He feels buying CFDs on dividend paying companies is good insurance against a drop in the market as high yielding stocks can have a better track record when markets get rocky.

Jim decides to trade IAG just before its ex dividend date to capture its 13.5c dividend. He also decides to place a good til cancelled sell order at $6.00 believing IAG is likely to recover its dividend amount in the days and weeks after paying its dividend.

On March 6 2007, the day before IAG goes ex divided Jim buys 10,000 IAG CFDs in for $5.80. He also places a good til cancelled order to sell his IAG CFDS at $6.00.

Dividend paying stocks are important for a number of reasons.

Trading share CFDs that pay dividends can offset costs such as brokerage and interest charges. Dividend paying share CFDs may also attract interest from "yield hungry" investors. The underlying stocks can sometimes be less susceptible to being sold off in the event of a general market decline.

As a guide the average dividend yield for the S&P/ ASX 200 is just under 4% so shares that pay higher dividend yields can remain popular under changing market conditions.

Risk
Buying CFDs over high dividend yielding companies, as with any other share or CFD, carries the risk that its price may fall. Shares/CFDs should not be bought on the basis of their (dividend) yield alone. Other criteria such the sustainability of company earnings, its liquidity and dividend yield compared to other shares in the same sector or index need to be taken in account.

Summary:
Dividends are an important consideration for both short and long term traders. For short term CFD traders there is the potential to make greater returns by holding the share CFD just long enough to capture the dividend. For longer term traders dividend paying stocks often perform well, even when the broader market is in decline.

More about CMC Markets CMC Markets is a pioneer of CFD trading in Australia. Our goal is to empower Australian traders by giving you access to CFDs over Australian and global markets and the ability to trade on leverage and potentially profit in almost any market condition. We run regular CFD introduction seminars and education courses around Australia for traders new to CFDs and are committed to providing a cost effective CFD trading service. Click here for more info or to start trading CFD's.