Dividend-Adjusted Returns and Price Behavior Around Payment Dates

Summary

The document asks how stock returns and historical prices should account for dividends, including how adjusted share prices reported by Yahoo Finance are calculated. It frames the issue around the price movement near a dividend payment: a stock may rise before payment and fall after it, so apparent price returns can differ from the investor's overall return once the cash distribution is considered. The answer assumes the question concerns behavior around payment dates and points readers to Yahoo's help information for its adjustment procedure.

The response says the observed price drop has been found to be approximately the dividend yield, while also noting evidence that a premium may accrue during the run-up to the dividend date. It does not specify an agreed adjustment formula, explain Yahoo's calculation, or provide data, study details, or conditions under which the reported patterns hold. Those limits matter when using the brief observations to interpret adjusted prices or dividend-related returns.

Key ideas

• Dividend payments affect how share-price returns should be interpreted around payment dates.
• The response says the price drop has been observed to be approximately the dividend yield.
• It mentions evidence of a possible premium during the run-up to a dividend date.
• The response does not explain Yahoo Finance's adjustment calculation or give a full adjustment formula.

Tags

# Returns adjusted for dividends


# Returns adjusted for dividends












In various financial models such as CAPM, Black Scholes, one assumes the returns are adjusted for dividends.

As I understand it, the share price often (in a relative sense) increases a bit before the dividend is paid, and decreases a bit once the dividend has been paid. This intuitive so you cannot make a significant profit by buying and selling before and after the dividend is paid. Please correct me it I'm wrong however.

In light if this, what is the agreed upon way(s) for adjusting share prices for dividends? Yahoo finance report "adjusted" share prices for example -- how do they calculate them?

## Answer by RndmSymbl (score 1, accepted)

https://quant.stackexchange.com/a/15336

I am assuming that you are interested in how the returns behave around dividend payment dates, since the adjustment process for Yahoo is covered in their help section. The drop has been found to be aprox. the amount of the dividend yield. More recently it appears, that in the run-up to the dividend date some premium may be earned.

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.