Some bond coupons are securitized and sold as strip bonds. Why can't stocks be similarly "stripped" to produce securitized dividend strips? Is it merely because there is no demand for such a product?
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3 Answers
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Sounds like you want a Dividend Swap?
These things trade OTC... there are quote windows in the BBG terminal.
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$\begingroup$ Where do the quotes come from? Are they posted by the BBG users themselves? $\endgroup$– FluxSep 7, 2020 at 3:17
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1$\begingroup$ Quotes from market makers, I'm not familiar with the market structure for these products but I imagine it's largely big investment banks who will buy/sell the swaps and warehouse/hedge the risk until expiry. $\endgroup$– StackGSep 7, 2020 at 3:23
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$\begingroup$ There are also Dividend Futures on the CME, but they are for the S&P500 index, not individual stocks. $\endgroup$– nbbo2Sep 7, 2020 at 3:23
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$\begingroup$ If you can trade a single-stock future, you could probably create a synthetic 'dividend future' by holding the underlying and shorting the future, or vice versa, since the future doesn't receive dividends $\endgroup$– StackGSep 7, 2020 at 3:31
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A viable securitization market requires the following:
Credit support mechanism to achieve credit rating targets and satisfy investment criteria for institutional buy-side managers
Contractural cashflow schedules with legal maturity dates to offer tranches that produce average lives matching buy-side preferences
Private liquidity providers supplying secondary market liquidity to buy-side managers e.g. hedge-funds
Exchange-traded identifiers: CUSIPs, ISINS, SEDOLS
Regulator support: SEC financial reporting requirements
While there may exist demand in the OTC market for stock dividend strips (ex. dividend swaps), we can see from the list above where the gaps to securitization lie.
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They certainly exist - there are even (sort-of-liquid) dividend futures for these on the Eurostoxx index (the old DEDZ, now FEXD, series), and (less liquid) for the Nikkei.
These differ from Treasury strips in two important respects. Strips give you either a riskless future income stream (via coupon) or riskless principal. So long as the underlying Treasury sits in escrow, there is no uncertainty (assuming the credit of the US Treasury remains intact, of course). Securitised dividends obviously represent more of a speculation with respect to the level of the future dividends paid.
The hedging of this risk ends up meaning that divi futures often have a pretty much 100% correlation to the equity market that pays them. So from a diversification perspective, holding them in preference to a future on the underlying is not going to impress any risk officer about diversification very much.
This does create situations, from time to time, where the divi curve creates "crazy roll-downs", ie dividends forecast to fall by say 50% in 5 years, so a ~10% annual return for holding "equity-like risk" on the assumption of no-Depression-like outcomes. Which is why people do step in and buy them (rather than the index futures). However, the people who do this are people who probably would have held the index instead in their portfolios; and the future looks like a "better" way to play the equity. They're not doing it, because the divi is any way materially different, or diversifying. It's just more of a nuanced way for people to play equities a little differently at the margins. Which is why it's never become really mainstream.
