4 – M1L4 04b Dividends V2

The next corporate action we’ll talk about is dividend, specifically cash dividends. Dividends are when companies share some fraction of their profits with their shareholders. Let’s take a look at Qualcomm which pays out dividends pretty much every quarter. On May, 21st of 2017, they paid out $0.57 per share. However, dividends are given to everyone that hold shares in the stock at the time of the payout. A shareholder must have bought the share before the ex-dividend date. An ex-dividend date is the cutoff point to receive the future dividends. Let’s take a look at an ex-dividend date for AIG. AIG had announced on February 8th, 2018 that they will be giving out dividends in the future. The date the dividends will be given out is March 29th, 2018, the ex-dividend date is March 14th, 2018. Whoever held the stock before the state will receive the dividend. With the basics of dividends out of the way, let’s go over adjusting the prices to dividends. We’ll start with why we adjust the prices based on dividends. Imagine that you own one share of company A and one share of company B, both are worth $50. The next day is an ex-dividend date of $1 in dividends for company A. That day, company A closes at $49.50. Company B does not have ex-dividend date, but also closes at $49.50. If you only looked at the prices, you might think you lost $0.50 on both stocks. In reality, you made $0.50 on company A and lost $0.50 on company B. Just like the stock splits, we’ll normalize the prices to reflect this. To get the normalised prices, we first need to calculate the adjusted price factor. The formula for this is 1+D over S. D is the dividend, S is the stock price at ex-dividend date. To normalize the price, you would divide the historical price by the adjusted price factor up until the day before the ex-dividend date. With the knowledge you’ve just learned, let’s dive into technical indicators.