Vanguard expert on total return vs. income producing

[ERD50]

Quote:

Originally Posted by Mulligan .... The stock was at $102. Which it has been since April 2014. It went ex D of $1.94. My vanguard account didn't even acknowledge the distribution and kept stock at $102. ... Keep in mind ZERO shares have traded during this time. Zero shares have traded. $9.70 of dividends have passed through without a trade. ...

I am also not aware of any law/rule that the exchange is required to update the price.

AFAIK, the price shown is the last price it traded at. If there are active bid/asks, the mid-point of those might better reflect the implied price.

You see this with options all the time. Even on highly traded stocks, a particular option may not have any trading activity for a day or more, but might be close enough that people (computers?) are watching it. And if the underlying stock is moving, you can see the bid/ask on that option move with it. But the reported price on the option doesn't change over those days, it is the same as the last trade of that option.

It makes it tough to do any historical analysis on options, you need access to the bid/asks, the prices often don't move day to day.

-ERD50

[Mulligan]

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Originally Posted by robertf57 I'm not aware of any law that would set a price on the open exchange.... And because of the continuous bid ask process, even if there was an instantaneous price set by statute, it would have no practical effect on prices that occur in the market. Too many other forces at play. Sent from my iPad using Early Retirement Forum

I have always been under the impression that what Jim's and your post stated was the way it transpires. That would explain in my mind anyways why an ex D stock that doesn't trade does not have its price automatically lowered by said amount.


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[Mulligan]

Quote:

Originally Posted by ERD50 I am also not aware of any law/rule that the exchange is required to update the price. AFAIK, the price shown is the last price it traded at. If there are active bid/asks, the mid-point of those might better reflect the implied price. You see this with options all the time. Even on highly traded stocks, a particular option may not have any trading activity for a day or more, but might be close enough that people (computers?) are watching it. And if the underlying stock is moving, you can see the bid/ask on that option move with it. But the reported price on the option doesn't change over those days, it is the same as the last trade of that option. It makes it tough to do any historical analysis on options, you need access to the bid/asks, the prices often don't move day to day. -ERD50

I agree. I was trying to keep bid/ask price out of the theoretical discussion because that was another can of worms! But since you brought it up.... I was sticking to last traded price of $102. But the bid price was $100 and ask was $175 and both were stagnant months on end. I got it bought at $108, but only a partial trade of 73 shares and that was it. I already knew this going in, but most will not even adjust the price unless a 100 share purchase occurred. So I instantly "lost" over $400. Unless I cite Yahoo finance who was the only website I found that adjusted the stock price to my purchase of $108.
Illiquids are crazy little creatures.

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[mathjak107]

Quote:

Originally Posted by ERD50 I am also not aware of any law/rule that the exchange is required to update the price. AFAIK, the price shown is the last price it traded at. If there are active bid/asks, the mid-point of those might better reflect the implied price. You see this with options all the time. Even on highly traded stocks, a particular option may not have any trading activity for a day or more, but might be close enough that people (computers?) are watching it. And if the underlying stock is moving, you can see the bid/ask on that option move with it. But the reported price on the option doesn't change over those days, it is the same as the last trade of that option. It makes it tough to do any historical analysis on options, you need access to the bid/asks, the prices often don't move day to day. -ERD50

well now you are aware of it. see what you learn here . here is the finra rule requiring the offset .


5330. Adjustment of Orders

(a) A member holding an open order from a customer or another broker-dealer shall, prior to executing or permitting the order to be executed, reduce, increase, or adjust the price and/or number of shares of such order by an amount equal to the dividend, payment, or distribution on the day that the security is quoted ex-dividend, ex-rights, ex-distribution, or ex-interest, except where a cash dividend or distribution is less than one cent ($0.01), as follows:
(1) Cash Dividends: Unless marked "Do Not Reduce," open order prices shall be first reduced by the dollar amount of the dividend, and the resulting price will then be rounded down to the next lower minimum quotation variation.
(2) Stock Dividends and Stock Splits: Open order prices shall be determined by first rounding up the dollar value of the stock dividend or split to the next higher minimum quotation variation. The resulting amount shall then be subtracted from the price of the order. Unless marked "Do Not Increase," the size of the order shall be increased by first (A) multiplying the size of the original order by the numerator of the ratio of the dividend or split, then (B) dividing the result by the denominator of the ratio of the dividend or split, then (C) rounding the result to the next lowest share.
(3) Dividends Payable in Either Cash or Securities at the Option of the Stockholder: Open order prices shall be reduced by the dollar value of the cash or securities, whichever is greater. The dollar value of the cash shall be determined using the formula in subparagraph (1) above, while the dollar value of the securities shall be determined using the formula in subparagraph (2) above. If the stockholder opts to receive securities, the size of the order shall be increased pursuant to the formula in subparagraph (2) above.
(4) Combined Cash and Stock Dividends/Split: In the case of a combined cash dividend and stock split/dividend, the cash dividend portion shall be calculated first as per subparagraph (1) above, and the stock portion thereafter pursuant to subparagraph (2) above.

[mathjak107]

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Originally Posted by Mulligan I have always been under the impression that what Jim's and your post stated was the way it transpires. That would explain in my mind anyways why an ex D stock that doesn't trade does not have its price automatically lowered by said amount. Sent from my iPad using Tapatalk

well you were wrong about that . they certainly are adjusted automatically .

[MichaelB]

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Originally Posted by mathjak107 well now you are aware of it. see what you learn here here is the finra rule requiring the offset .

If you're going to quote a source, please provide a link (see here for more detail)

[mathjak107]

the finra manual

FINRA Manual - FINRA Rules - 5000. SECURITIES OFFERING AND TRADING STANDARDS AND PRACTICES - 5300. HANDLING OF CUSTOMER ORDERS - 5330. Adjustment of Orders

[MooreBonds]

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Originally Posted by ERD50 Quote: Originally Posted by soupcxan Finance theory agency problem: managers with excess cash will spend it on poor investments just to make the firm larger when they should be returning it to shareholders. signaling: management knows that cutting the dividend is received negatively by investors. so a manager that establishes a dividend is signaling that the firm has good prospects and won't need to cut the div I'm sure there are academic studies that support these theories. Probably an equal number that don't support it. I don't disagree with that line of thinking, what I'm asking is, 1) does it play out in a meaningful way in real life? 2) Is the delta significant enough for me to change my investment strategy? 3) If so, at what point is it noticed and arbitraged away? Answering my first two questions requires data. If an equal number of studies were to dispute/support the idea, there probably isn't anything significant there. -ERD50

Another thing to keep in mind: Dividends don't typically have wild swings. However, as we all know, both dividend-payers and non dividend-payers have (sometimes) wild swings in stock prices, based on the fickle short-term mentality of Wall Street. When do you sell small positions to pay your bills and fund retirement? Timing when to sell those shares can be a big impact on your "total return". However, if you are able to largely live off of just the dividends, then you don't have to worry about "well, they just came out with earnings that displeased the street, and the stock dropped 10%, and I need to sell X shares - do I sell now? Wait 1 month? 2 months?".

So while I agree in principle that "Total Return" is what is important....the reality and mechanics of it leads me to tilt more towards "Total Cash Flow" metrics rather than straight-up "Total Return".

[jim584672]

Adjustment of orders refers to open limit orders and stop limit orders. Do not confuse adjustment of orders with setting a price. Market order pricing is set by buyer and seller. The market sets the price at all times. There is no mechanical means by which an ex div price is set, other than by the market adjusting itself.

[Mulligan]

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Originally Posted by mathjak107 well you were wrong about that . they certainly are adjusted automatically .

According to your link, it does not refute my statement or make it in error. Your link if I am reading it correctly reduces OPEN orders of a stock automatically. It did not mention it reduced the actual quoted stock price by the dividend. Which gets back to my original point ( and keep in mind this is a minor amusing observation to me, not a who is right or wrong debate) that the stock price is not adjusted at ExD.
If I understand your link correctly it adjusts open orders. Which would actually support my observation since because I currently have 2 stocks that have not moved from their last traded price despite going ExD. But both though have had their bids dropped accordingly by same price of dividend. I just assumed the buyer did it. The exchange did it. So I actually learned something there.


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[ERD50]

Quote:

Originally Posted by mathjak107 well now you are aware of it. see what you learn here . here is the finra rule requiring the offset . ... .

OK, thanks. I either misread or misinterpreted what you were saying then. I do have a vague recollection that open limit orders will be adjusted by the dividend, and that makes sense to me.

But I still don't think that the listing price is altered until a trade occurs, but maybe that isn't what you were talking about?

-ERD50

[Mulligan]

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Originally Posted by ERD50 OK, thanks. I either misread or misinterpreted what you were saying then. I do have a vague recollection that open limit orders will be adjusted by the dividend, and that makes sense to me. But I still don't think that the listing price is altered until a trade occurs, but maybe that isn't what you were talking about? -ERD50

That has been the source of confusion, ERD. We have been referring to the stock price, while Mathjack has been referring to the open order of a stock. Jim58 is the one who has been expressing this all in a concise and accurate matter. Or at least to me you are Jim!


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[jim584672]

Some people try to capture dividends and sell shortly after the ex date with the hope the market prices the stock too high after the ex date.

[ERD50]

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Originally Posted by Mulligan I agree. I was trying to keep bid/ask price out of the theoretical discussion because that was another can of worms! But since you brought it up.... I was sticking to last traded price of $102. But the bid price was $100 and ask was $175 and both were stagnant months on end. ...

Yes, on thinly traded stuff, the bid ask can have some crazy spreads.

Back when I was doing more options on individual stocks, I was able to get to something from my broker that showed the bid/ask prices further down (I forget the correct terms now). So you might see offers to sell @$110 with 400 shares on one side, and $111 would have 1000 shares offered. So you had some idea that if you were trying to buy 500 shares at $110, you might not get filled, and might need to go up to $111 for the remainder. Unless HFT changed all this!

-ERD50

[Mulligan]

Quote:

Originally Posted by ERD50 Yes, on thinly traded stuff, the bid ask can have some crazy spreads. Back when I was doing more options on individual stocks, I was able to get to something from my broker that showed the bid/ask prices further down (I forget the correct terms now). So you might see offers to sell @$110 with 400 shares on one side, and $111 would have 1000 shares offered. So you had some idea that if you were trying to buy 500 shares at $110, you might not get filled, and might need to go up to $111 for the remainder. Unless HFT changed all this! -ERD50

That would be very interesting info to have and track. There is some interesting behind the scenes numbers I will be able to briefly view. A bid of 100 shares implying not much interest, but when it sells I may briefly see a 1000 order next in line bid only to see it vanish to 100 to align with the amount that is offered lowest as an ask price.
At times I will see a transaction occur above the ask price which doesn't make sense to me unless it is because a behind the front lines of the bid/ask there is a bigger allotment of Ask that matches the bigger Bid order to buy it and the bid person caves in to the price?


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[mathjak107]

Quote:

Originally Posted by ERD50 OK, thanks. I either misread or misinterpreted what you were saying then. I do have a vague recollection that open limit orders will be adjusted by the dividend, and that makes sense to me. But I still don't think that the listing price is altered until a trade occurs, but maybe that isn't what you were talking about? -ERD50

it is the open orders that set the opening prices. when you reduce them all incoming prices follow .

[mathjak107]

interesting reading on the subject. i will post the link below .



What Really Happens To A Stock
Price On The Ex-Dividend Date?

It's commonly stated that the price of a stock is automatically adjusted down by the amount of the dividend on the ex-dividend date and while in practice it often looks as if that's what takes place, technically that's not really what happens. The only trade price that the exchange reduces by the exact amount of a dividend is the quote of the previous day's close, not any actual trade. But because the quote of the previous day's closing trade AND the bid and the ask of all outstanding orders are also reduced (unless placed with a Do Not Reduce restriction) by the exchange, plus the fact that the net asset value of the stock is now less (by the exact amount of the dividend), when trading begins on the ex-date the effect is usually a reduction in price approximating the size of the dividend, as traders are well aware of the reduction in the stock's net asset value.

Such an informal (though generally effective) reduction in stock price on the ex-dividend date is, of course, much more noticeable if the dividend is larger than the normal trading range of the stock. For example, if a stock has a normal daily trading range of, say, twenty five cents and the dividend is a few cents, the effect of a few cents' adjustment of the stock price may not be noticeable. However, if the dividend is two dollars, the price adjustment will nearly always be very noticeable, as it's well beyond a twenty five cent normal daily trading range.

So, while the market is free to trade the stock at any price on the ex-date, even at the open, much more often than not it trades lower by about the amount of the dividend. The only way to be sure whether any specific stock will or won't do so on its ex-date is to wait and see what happens.


What Really Happens To A Stock Price On The Ex-Dividend Date

[Mulligan]

I agree with you on what you are saying Mathjack, but it doesn't seem to back up what is happening with illiquids. The article above says the quote of the preceding day is reduced. But that is not happening. Just to give an example. On Fidelity stock website, AILLL is listed as last trade at $26.24. This last trade was July 7. It went exD July 9. Fidelity shows the last trade date next to price. The price remains $26.24 even though 2 trading days have since passed. Now I fully expect the next trade to be lower whenever it happens because it always gets bid up right before going ex.
It just appears to me based on my observations of illiquids that Jim's explanation is the only one that can make sense for this situation.


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[dallas27]

Quote:

Originally Posted by Danmar Div paying stock are often less risky and have lower betas. I have often wondered if SWR can be higher for div paying stock? Probably.

Would be a study worth reading of anyone ever did that....



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[NW-Bound]

Quote:

Originally Posted by mathjak107 ... Such an informal (though generally effective) reduction in stock price on the ex-dividend date is, of course, much more noticeable if the dividend is larger than the normal trading range of the stock. For example, if a stock has a normal daily trading range of, say, twenty five cents and the dividend is a few cents, the effect of a few cents' adjustment of the stock price may not be noticeable. However, if the dividend is two dollars, the price adjustment will nearly always be very noticeable, as it's well beyond a twenty five cent normal daily trading range...

+1

The effect of going ex-dividend on a single stock is generally masked out by the daily fluctuations because the quarterly dividend is minuscule nowadays.

But watch the MFs going ex-dividend once a year, and tell me that you do not see it.