An over-the-counter swap where two counterparties exchange a stream of future cash flows at set dates in the future over a specific term. The fixed leg of the swap is based on the payment of pre-defined fixed amounts at sequential intervals in return for the payment by the floating leg of future dividend flows on a share of stock or a basket of stocks (stock index).

The payments are multiplied by a notional number of the underlying shares. Like a standard swap, the dividend swap is arranged so that its economic value at initiation is zero. That is, the value of the fixed payments is equal to the value of the floating payments over the term of the swap. One of the main reasons for entering into such dividend swaps is tax avoidance on dividend income. Also, dividend swaps on indexes can be instrumental to hedge a large portion of dividend risk for a relatively reasonable cost.