Dividend Adjustments for Trading Signals and Total Returns

Summary

The document considers whether historical equity prices should be adjusted for ordinary dividends when backtesting strategies, alongside the existing adjustments for splits and special dividends. Its practical guidance separates signal construction from performance measurement: a price only technical signal should use the unadjusted price series, while returns should include dividend income to represent total return.

This distinction prevents dividend adjustments from altering the historical price inputs that a price based rule would have observed, while ensuring the portfolio’s measured payoff reflects cash distributions. The response is brief and offers no worked example or discussion of alternative signal designs. Strategies that explicitly use total return or dividend adjusted features may need different inputs, so the recommendation depends on what the signal is intended to measure.

Key ideas

• Price only signals should use prices that have not been adjusted for dividends.
• Backtest performance should include dividend income as part of total return.
• Signal inputs and return calculations serve different purposes and can use different price treatments.
• The guidance is specific to price based signals and does not cover strategies built from total return data.

Tags

# Backtesting and dividend adjustments


# Backtesting and dividend adjustments












I am backtesting a number of trading strategies using a feed of unadjusted data from Factset. Before I run the backtest my routines adjust the data for splits and for special dividends.

One question that has come up is should I also be adjusting the data for dividends as well? So far I have seen 3 arguments:

- Yes you should adjust.

- No you shouldn't adjust as technical analysis algorithms will be using incorrect data.

- You shouldn't adjust while generating opening and closing positions but should adjust for working out total return

I'd be grateful for any thoughts on the matter.

## Answer by Larasing (score 1)

https://quant.stackexchange.com/a/25447

Your return calculation should be on total return, i.e. include dividend income. Your signal, if it is price only, then you should take the price series and not adjust.

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