For instance, if the investor bought the 2012 dividend future at $0.90, he would make a profit of $0.10 per contract.
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).
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.
In 1999 Professor Michael J. Brennan of the University of California at Los Angeles proposed the creation of dividend strips for the S&P 500.
The biggest players were investment banks looking to cover their future dividend exposure from derivatives positions they had on their books.
The exchange listing made these products available to wider range of investors who could not trade over-the-counter (OTC).
By investing in a single stock dividend future, an investor has a proxy of a company's earnings.
By investing in an Index dividend future, investors have a similar exposure, except they're taking a view on a basket of companies.
The listing also brought new players, who were not active in the Over-The-Counter market, such as asset managers, pension funds and family offices.
The market not being anymore reserved to some few specialists, volumes picked up and number of participants grew.
[15] From an investor perspective, dividend futures give exposure to a specific cash flow stream from a company.