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).
Comments 1
The XLQ (qmatix.com) add on for Excel sure makes these calculations simple. No more manual editing. I have it setup similar to Ulli's StatSheet which I can compare, to make sure I'm on track with my data. A few macros and I can quickly change views to help me see the trend. This sure has shortened my review time. It took awhile to learn and setup but it sure is worth it. Thanks to another reader who mentioned XLQ recently for monitoring a trailing stop loss and to Ulli for posting it in his blog. Another example of helpful information that we learn from Ulli's blog.