The recent surge in implied dividends has been so vigorous dealers say there is little upside left in going long dividends.

Dealers are inherently long dividends as a result of popular structured products sold to clients, such as reverse convertibles and auto-callables. These products pay investors a high coupon provided the underlying reference shares do not fall below a certain barrier. If the price of any of the stocks does fall below this level, the products redeem in shares. The structures mean dealers are effectively long a downside put and become progressively longer dividends as equity markets tumble.

In the months after the collapse of Lehman Brothers in September 2008, this effect caused nasty losses for dealers. The move created a wave of forced selling, which also saw hedge funds that were long dividend swaps struggle to get out of positions. Hedge funds that racked up large losses on dividends include Chicago-based Citadel, according to sources familiar with the matter.

From their peak in July 2007, dividend swaps on the Dow Jones Eurostoxx 50 index maturing in 2014 had fallen to a low of 55.5 points by January 2009, according to Citi - a 75% drop.

But since then, dividends have staged a comeback. With these low levels viewed as oversold, banks have made a concerted effort to market dividends to a variety of clients. At close on March 24, 2014 Dow Jones Eurostoxx 50 index dividend swaps were trading at 116.2 points, according to Citi. Liquidity in the market has also been bolstered by a growing array of exchange-traded dividend products - something dealers say has encouraged greater participation from institutional investors, high-net-worth investors, pension funds and even sovereign wealth funds.

This interest has now reached the point where there is little upside remaining in taking an outright long position in dividends, say dealers. Instead, clients are looking at alternatives including steepener trades, says Iain Flockhart, European head of delta-one trading at Barclays Capital in London. "2010 and 2011 dividends are now trading reasonably close to fair value, but if you go out along the curve there is little growth being priced in. That is the area where we are seeing most client interest at the moment," he said.

According to dealers, clients are looking to sell 2011 and 2012 dividends and go long dividend swaps that mature in 2015 or 2016, for example. While this strategy offers the potential for future upside, it is also suitable for investors that remain nervous about the economy's near-term prospects, said Flockhart. "Given the uncertainty in the market, lots of people do look for protection in the near term but still want to be well positioned if that doesn't occur," he said.

While structured product issuance has been muted since the Lehman Brothers bankruptcy in September 2008, dealers caution that one risk to the trade includes the possibility of future issuance - something that could lead to more forced selling.

Among more sophisticated clients, dividend options are also gathering attention. Dividend options could make a lot of sense for investors sitting on gains from long dividend positions, analysts said. Pam Finelli, European head of equity derivatives strategy at Deutsche Bank in London, said both call and put overwriting have been popular among clients. "We have seen people looking to overwrite their dividend position, where they were long dividends and made quite a profit but don't see 2011 or 2012 dividends moving substantially," she said.

By selling a call, investors are giving up upside beyond a certain level in return for premium. By selling a downside put, they are expressing a willingness to take on further exposure if dividends fall, again in return for a premium. In some cases, investors have also been combining the sale of calls and puts in short strangles, meaning they make money if dividends remain in the range between the two strikes, but lose it if dividend levels move beyond these points.

Elsewhere, dealers believe the recent rally in dividends could encourage interest in buying downside puts to protect investor gains. Although activity in dividend options has been less frequent than steepener trades, several dealers said they expect demand for these strategies to rise in the coming months.