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Dividends
We frequently receive questions from our customers about dividends and how they are represented on our charts.
Dividends are a distribution of profits to the shareholders. A dividend can be distributed in the form of cash, stock, or product or it can be reinvested back into the company.
It is cash dividends that we are concerned with in this article since they are the most common cause of confusion. A cash dividend can vary in amount from a few pennies to a few dollars, though the latter is uncommon. When a distribution is made it alters the price of the stock, lowering it by the amount of the payout to the shareholders.
On a non-adjusted chart you will see a gap down where it occurred if the distribution is large enough. Most often the new trading price is the only change a chart will receive and that can lead to erroneous decision making.
Prophet.Net updates the chart so that all prices prior to the dividend are adjusted to take the dividend into account. This eliminates the gap from the dividend and also adjusts the data that is used in calculating technical indicators.
The chart above (from another service) shows Microsoft after its ex-dividend of $3 on November 17, 2004. Most charting companies do not make an adjustment for the dividend. If the distribution is large enough, you will see a gap down where that dividend occurred. This is not a realistic view of the chart, since the dividend has not been taken into account on the chart, and what might look like a very bad day for a stock might have actually been a good day. This chart has not been adjusted backward like the chart below.
This is the same Prophet.Net chart which shows adjusted data – you can easily see how the two charts differ especially in relation to the output of the PSAR (Parabolic Stop-and-Reversal) indicator. The first chart shows an immediate sell signal at the distribution because the data indicates a large drop in price.
The Prophet.Net chart shows a continued bullish direction and then reverses at a later date. An indicator is only as good as the data it receives. By back-adjusting the data, we are able to provide more accurate data for our indicators.
There are many positive reasons for a company to distribute dividends. It can provide tangible proof of a company’s success, and it can also show in the long-term benefits if a dividend is reinvested back into the stock.
If you look at the chart below you’ll see a comparison of the Dow Jones Industrial Average ($INDU) and the Diamonds Trust (DIA).
DIA has grown in value over time faster than $INDU because of dividend distributions (retained earnings) and has recently reached an all time high even though the corresponding index $INDU is not close to its all time high of January 2000.
There are many decisions which go into creating charts for technical analysis and how to represent dividend distributions is only one of the considerations. Prophet prides itself on providing the best tools and data available for making effective trading decisions.
To view the charts mentioned above, start by going to JavaCharts.
Prophet.Net : Analyze : JavaCharts
MSFT – a one year daily chart with PSAR (Click on the Tools menu, select Studies, and then Apply Studies)
DIA – a one year daily chart with a comparison chart of $INDU (click on the Tools menu, select Studies, and then Comparison Chart)
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