SGX: Spotlight on Nikkei Dividend Futures as Japan Dividend Yields Spike

OREANDA-NEWS. In February, the drop in Japanese stock prices resulted in a spike in the dividend yields of the underlying stocks of the Nikkei 225 Index, rising as high as 2.16% based on estimates for the fiscal year ending March 2016 -- a level not seen in more than three years since December 2012. Given that the yield reflects dividend payments relative to price per share, dividend yield increases as stock prices fall.

Nikkei 225 Index Price Movement and Net Aggregate Dividend Yield

Besides the fall in stock prices, the high dividend yields have also been bolstered by the large number of Japanese firms that have announced their intention to continue or upgrade preliminary dividend plans in spite of the reduced growth outlook. As one of the more noticeable outcomes of the third Abenomics arrow of structural reform, Japanese companies have focused more on shareholder returns through committing to increased dividends and share buybacks. This government-led push aims to encourage companies to boost dividend payouts instead of hoarding funds, with the hope that the cash injection into the economy will drive a virtuous cycle of consumption and growth.     

The elevated dividend yields may push Japanese investors to shift funds from bonds to stocks as the Bank of Japan’s negative interest rate policy has caused yields on long-term government bonds to slip to record lows. The spread between dividend yields and yields for the benchmark 10-year Japanese government bonds reached 1.98 points on 24 February, the widest in around three years.

Record Dividends Expected For Fiscal Year 2015 (Ending 31 March 2016)

SGX Nikkei Dividend Index Futures (ND) is the first Asian dividend futures, and is the market leader with approximately 99% of the outstanding Nikkei Dividend futures positions. The underlying index of the ND calculates the accumulated dividends that an investor would have been entitled to receive if the investor had held the constituent stocks of the Nikkei 225 Index over the Japanese fiscal year from 1 April to 31 March. The last trading date of the ND is the last business day of March for the contract year, i.e. the 2015 futures contract’s LTD will be on 31 March 2016. The ND contract will be finally settled to the value of the underlying Nikkei Dividend Index as determined by Nikkei Inc. on the first contract day in April.

Highest Nikkei Dividend Index Final Values (Since 1998)

Source: Nikkei Inc., SGX (data as of 25 February 2016)
*Forecast based on implied dividends from SGX Nikkei Dividend Futures prices

Based on current market expectations, dividends for the 2015 fiscal year (ending March 2016) will be a new record at 327 index points, coming in 23% higher than the 265.12 index points of 2014. The ND price is expressed in Nikkei 225 Index terms.  For instance, if the Nikkei 225 Index was trading at 16,000 and the expected dividend yield was 2%, then the price of the ND futures would be 320 index points. The current contract year is 2015 (as the Japanese fiscal year begins in April) and the contract trades further one year maturities currently through to 2025. 2015 would be the first year that the ND achieves a value above 300 index points.

Nikkei Dividend Index Historical and Forecasts by Fiscal Year (Index Points)

Year-to-date performance of the ND futures has been varied with further out contract year’s expectations changing the most. For the 2015 contract year, dividend expectations have improved marginally by 0.1% despite the 15% drop in the Nikkei 225 Index over the last two months. However, for the forward years, negative dividend expectations have resulted in a downward adjustment of 10% to 16% for the next five contract years.

Year-To-Date Performance of SGX Nikkei Dividend Index Futures

Nikkei Dividend Futures: Asset Class and Hedging Tool

SGX introduced the SGX Nikkei Dividend Index Futures (ND) contract in 2010, pioneering dividend futures in Asia. Dividend futures have grown to become an important asset class and due to the low correlation of dividends to other asset classes, they are commonly used to create efficient portfolios. SGX is the dominant market for Nikkei Dividend Futures, with approximately 99% market share of global outstanding positions and volumes.

In January, ND turnover spiked to almost 20,000 contracts, the highest volume in more than 30 months as investors turned to the dividend futures market to take pure dividend exposure or hedge away dividend risk. The advantages of the exchange-traded ND contract compared to over-the-counter swaps include fine-tuned pricing (up to 2 decimal places for block trades), inherent transparent price discovery and valuation as well as central counterparty risk mitigation.

SGX Nikkei Dividend Index Futures

SGX Offers a Comprehensive Suite of Japanese Equity Derivatives

SGX’s Japan-related equity derivatives comprises the Yen Nikkei 225 Index Futures and Options, USD Nikkei 225 Index Futures, and the Nikkei Dividend Futures. The SGX Yen Nikkei 225 Index Futures is the dominant offshore centre for trading Nikkei 225 Index derivatives. SGX offers extended trading hours for the Nikkei 225 Index Futures and Options up until 2am Singapore time, covering the London close.

In addition, SGX’s Japan-related equity derivatives remain available for trading on all Japan holidays, with the exception of New Year’s Day (1 January). Margin discounts on spreads formed with other SGX derivatives allow for greater capital efficiency for investors that has views on multiple Asian markets. 

Cross-Product Margin Offsets