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Josh McCormick
2020-07-09 16:11:55
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For stocks (ETFs, etc) which have dividends, those dividends are paid out on their PAYMENT DATE.
A month or so before that might be the EX-DIVIDEND DATE. Generally, people who own the security into the opening of the ex-div date will be paid the dividend.
What also happens on the ex-div date? The market automatically reduces the OPENING PRICE by an amount equal to the dividend payment. Unfortunately, your indicators aren't going to be aware of this.
SPECIFIC EXAMPLE
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Verizon's (VZ) ex-dividend date is on July 9th, 2020. Its payment date is on August 3rd, 2020.
Verizon has a dividend of 4.44%. Dividends paid quarterly, so a 1.11% dividend is paid per quarter.
VZ July 8th, 2020 OPEN : 55.11 CLOSE: 55.38 Normal market day [adjusted close yet to be applied]
VZ July 9th, 2020 OPEN : 54.65 Ex-dividend date
On the morning of July 9th, the opening price of VZ was adjusted down by the dividend payment. So the closing price on July 8th was adjusted down by (55.38 * 1.11%) 0.614718 to 54.77
AN INTERESTING OBSERVATION
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IMAGE: https://i.imgur.com/EPryLiR.png
The left side of the graph is the end of July 8th 2020 plus some after-market trade data (which in retrospect seems suspect). The right side has the start of July 9th trading in white. The "Jul 20" marking in the lower-left corner is due to a widescreen bug.
So there's a big drop in price, and it's normal market behavior. But my indicators are treating it as very significant (negative) price action behavior.
THE QUESTION
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Unfortunately, if you take no action, your indicators don't know this is happening. So as of the morning of the ex-dividend date, it sees the stock opening down with a 1.11% gap (in addition to anything else that's going on).
Is there a best practice for how to handle this? Do most people just live with it? How do most people compensate for this (if only to keep their indicators stable and sane)?
Thanks,
Josh McCormick
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