Why Dividend-Adjusted Prices May Differ From Investor Total Returns
Summary
The document investigates why a return computed from a vendor’s adjusted closing prices differs from a hand-calculated dividend-inclusive return. The explanation focuses on the ex-dividend date: the investor’s daily return includes both the new share price and the dividend received, relative to the previous close. The adjusted-price convention described instead subtracts the dividend from the previous close and compares that adjusted figure with the current close. These formulas produce different daily returns, which accumulate into a small difference over the example period.
The answer says this backward adjustment does not represent the investor’s actual total return, and notes that the same behavior occurs for a Bloomberg adjusted-last-price field. It points to a total-return index field as an alternative intended to reflect dividends properly. The example illustrates one vendor convention; the document does not establish that every data provider adjusts prices identically. Analysts should check field definitions before using adjusted prices to calculate returns.
Key ideas
- Investor return on an ex-dividend date includes the dividend with the current share price.
- The described backward adjustment subtracts the dividend from the prior close, yielding a different return calculation.
- Adjusted close series and total-return indices can therefore produce different results.
- Check vendor field definitions to determine whether a series reflects investor total returns.
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# Total Returns From Adjusted Close Prices
# Total Returns From Adjusted Close Prices
I'm trying to understand why the total return (return including dividends) that I get from calculating return using adjusted close price, does not equal the total return calculated in another manner.
My example is SNMP in the month of Aug 2018 (simply because it has a large price movement and pays a large dividend, so differences get amplified).
Looking at adjusted prices from yahoo (adjusted prices match Bloombergs) I calculate the total return as
```
(9.25 / 11.2570) - 1 = -17.83%
```
https://finance.yahoo.com/quote/SNMP/history?period1=1533009600&period2=1535688000&interval=1d&filter=history&frequency=1d
To compare I calculate the total return I would have experienced if I had invested $100 on 7/31.
```
Start = 100
PnL from unadjusted price change = 100 * ((9.25 / 11.75) - 1) = -21.2765
PnL from Div = (100 / 11.75) * 0.451 = 3.8383
PnL from Div reinvestment = 3.8383 * ((9.25 / 9.95) - 1) = -0.2700
End = 100 - 21.2765 + 3.8383 - 0.2700 = 82.2918
% Ret = (82.2918 / 100) - 1 = -17.71%
```
This matches the total return I get from Bloomberg and from https://www.dividendchannel.com/drip-returns-calculator/. But not the total return I calculated using adjusted prices above. The question is why not?
I dont think this is just a rounding error as the adjusted open price appears to have 4 digits of accuracy, and I have to tweak by more than 0.01 to make it match.
## Answer by Enrico Schumann (score 4, accepted)
https://quant.stackexchange.com/a/42472
It is indeed no rounding error, but follows from the way Yahoo computes the adjusted price: it does not reflect the actual returns of the investor.
Just look at August 17 and 20. The actual close prices were 10.75 and 9.95. On August 20 the company went ex-dividend for an amount 0.4508.
The return on that day is $\frac{P_t+D_t}{P_{t-1}} -1 = \frac{9.95+0.4508}{10.75}-1=-0.032483$.
What Yahoo does: $\frac{P_t}{P_{t-1}-D_t} -1 = \frac{9.95}{10.75-0.4508}-1=-0.0339055$.
Thus, their backward-adjusted price is $10.75-0.4508 = 10.2992$, which one could argue is simply wrong. But then, they probably never claim that it properly reflects returns.
By the way, since you mention Bloomberg: it does the same thing. If you ask for `PX_LAST` and have `DPDF` set to adjust dividends, you get the same adjusted price as Yahoo. If you retrieve a field like `TOT_RETURN_INDEX_NET_DVDS`, you get a properly adjusted price.Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)
This summary was written by Stratmill's research agent from the original; it is not a copy of the source.