Personal Finance & Money Asked by Chris Kiniry on August 17, 2020
I know that stock data (OHLC) usually includes two closing prices – Close and Adjusted Close. My understanding is that Adjusted Close is used to calculate returns. It adjusts the raw Close price to account for corporate actions of splits in the share price and dividends. Analysis should generally be based on returns and not prices.
My question is regarding the dividends. If I use the Adjusted Close price and calculate the 1-year return, say from 2019-01-01 through 2019-12-31 would this be the same thing as the return that I would get re-investing the dividends immediately when received? Or is this different, and just the return I would get from holding the shares and pocketing the dividend?
Not really. Adjusted Close update is happening on the ex-dividend date while if you would be "re-investing the dividends immediately when received", you cannot do it earlier than dividend pay date. It can be a couple of months between those two dates.
Correct answer by Kim Gold on August 17, 2020
Over the years, I have occasionally looked at Yahoo's adjusted closing prices. I understand how they calculate the adjusted close but I have never been able to get long term returns to reconcile properly - they generally exceed what one should get from the expected rounding errors.
Be that as it may, the adjusted close is used to compensate for share price reduction on the ex-dividend date and to a calculate position's return despite it.
Adjusted close prices are not involved with dividend reinvestment. The dividend's Payable Date varies from quarter to quarter as well as from company so it's impossible to factor that in. To do so, use a DRIP calculation such as this one.
Answered by Bob Baerker on August 17, 2020
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