More On Dividends And Sell Stops

Reader Trevor wants to clarify the adjustments that have to be made to the basis for calculating the sell stop when dividends are a being paid:

I am a bit confused about the treatment of dividends having read your recent posts.

I have set up a spreadsheet as you suggested using Yahoo and downloading each day – one column is the High which I amend manually if a new high is achieved since I bought.

If I understand right, it is from this number I deduct the dividend payment. So if the high was a 100.00 and the dividend payment 1.00 then the stop loss would be calculated as 7% off the post dividend high of 99.00. So far so good.

What happens if the market keeps rising (as it seems to be at the moment) and a new high of 101 is achieved? Here I assume that the stop loss now moves to 7% off 101 so negating the impact of the dividend payment?

You are absolutely right. Distributions from dividends and/or capital gains and market activity are two separate things.

In your example, the high price of $100 was correctly reduced by the amount of the dividend of $1 making the new high price $99, from which you now calculate your 7% sell stop. If market activity pushed prices higher, then the highest closing price above $99 becomes your new basis for calculating your stop.

As you pointed out, if prices make a high of $101, then that number serves as the new high point from which you calculate the 7% level, which in this case would be $94 (rounded off).

About Ulli Niemann

Ulli Niemann is the publisher of "The ETF Bully" and is a Registered Investment Advisor. Learn more
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