Dividend Swaps

A great number of investors will cringe at the mere mention of dividend swaps. This sometimes risky technique is often overlooked by the typical investor for several reasons. Nevertheless, dividend swaps are a great way to diversify your portfolio while also gaining an additional income stream. Even with the risks involved, today’s market is a great time to start investing your hard earned money into dividend swaps.

So what exactly are dividend swaps?
If the investor doesn’t cringe at the mention of dividend swaps then they will probably ask the above question. Dividend swaps are simply investing in the future dividends to be paid by a company. The investor takes the risks assuming the dividend payouts will be higher in the future. This exchange takes place outside of the stock market and is not always just a cash transaction. Dividend swaps can also be an exchange of stocks, bonds or other future dividends. Typically, the investor will purchase dividend swaps that consist of a basket of several high yield stocks. The goal is to find companies that are predicted to be more generous with dividends in the future. This is where the risk comes in, especially in today’s volatile market. Nonetheless, if you do your homework, you can really reap some amazing returns with dividend swaps.

Does the current economy make dividend swaps even riskier?
The current situation our world economy is facing leaves many investors having cold feet to invest in the stock market and other similar venues. This is where dividend swaps can really pay off big time if you put in the right research and find the right package. For example, the dividend payouts are currently at very low levels compared to a few years ago so this can be used to your benefit. If you can find a dividend swap that contains stocks of several high growth potential companies, you can really see a good return on your investment. Nearly all stocks should be more valuable within a few years, at least in theory. Thus, an economy that is climbing out of a recession offers a great opportunity for those wishing to invest in dividend swaps.

Are dividend swaps truly, honestly, really risky?
Even though they are deemed risky, dividend swaps are actually a sound investment. They offer the investor protection from inflation. Due to the oversupply from investment banks, a smart investor can pick up a lot of dividend swaps at a very cheap rate. The key is to do your homework and find the right dividend swaps to invest in. Another point to keep in mind is the fact that dividend swaps are often traded as if they will have zero growth in the future. Some dividend swaps have showed returns of over 90% over a long term investment!

In case you didn’t know, dividend swaps were listed on Eurex in June 2008 for the very first time. With these new products, dividend futures have seen a huge growth on the Euro Stoxx 50 index. This growth was much unexpected and quite a surprise that it was happening during an unprecedented economic crisis. Due to the downturn of the economy, most would expect asset-classes to disappear. Even with this in mind, there is still a little room for such products to enter into the market and because of this; an asset-class was born on nothing but uncertainty.

However, nearly all products can be directly linked to factors of the economy while dividends are simply a direct function of a company’s dividend distribution policy. In other words, the dividend payouts are determined by a company’s propensity and capacity to pay dividends. So, what this means is you can get a higher return by relying on the ability of the company to increase revenue while also increasing the will to distribute it to stock holders. So if you do your research and find the right fit, now is the perfect time to start investing in dividend swaps!

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