One of the unique things that we do in TradeStops which few, if any, other services do, is to adjust trailing stops for dividends and other corporate actions.
We have many TradeStops members who are professionals with different brokerage firms who use TradeStops for just this reason. One of our professional members told us “No one else adjusts alerts for corporate actions like TradeStops does.”
In order to understand why we go to the trouble to offer this unique benefit to our members, let’s take a look at a high-yielding stock – Annaly Capital Management (NYSE: NLY).
NLY is a Real Estate Investment Trust (REIT) that invests in mortgages and mortgage-backed securities. As with many REITs, they pay a high dividend rate. Currently, NLY pays a quarterly dividend of $0.30. That’s $1.20 in dividends per year. With the stock trading around $10.00, that’s an annual yield of about 12%.
You’ve probably heard the phrases “adjusted prices” and “unadjusted prices” in reference to stock price histories.
“Unadjusted prices” are price quotes exactly as they were quoted on any given day in market history. “Adjusted” historical prices, on the other hand, reflect the impact of corporate actions like dividends and splits on past historical price quotes.
Let’s say someone has owned this stock for a long time. If we just looked at this stock based on its closing prices, it would look like it had been a bad investment.
The stock was bought on 9/1/2009 for $18.14 and it closed on 2/23/2018 at $10.38. Just looking at the chart of the unadjusted closing price makes it look like the stock has been a real loser.
But this doesn’t show the dividend payments that have been paid over the past 8+ years. Let’s look at how this stock shows up in a TradeStops portfolio.
The stock has paid a total of $14.88 in dividends since its purchase in 2009. That’s over 80% of the purchase price of the stock.
When looking at stocks that pay dividends, using the adjusted closing prices makes more sense. The adjusted price takes into account dividends, stock splits, and other corporate actions.
Let’s look at NLY again – this time using both the unadjusted closing prices and the adjusted closing prices.
The adjusted entry price for NLY is $6.32. Now the investment in NLY includes all the dividends, and the chart makes more sense.
You might be asking why TradeStops is showing total dividends received of $14.88, but the adjusted entry price is only $11.82 below the purchase price? What happened to the other $3.06?
When we adjust the entry price, we use a formula that takes a percentage of the dividend into account. This is the same formula that Yahoo Finance and other sites use. You can find the formula in the TradeStops Knowledge Center here.
The rationale is easy to understand. It’s impossible for your cost basis to go below zero. Assuming that NLY continues to pay its regular dividend, in 3 years, the total amount of dividends paid will exceed the price paid for the stock.
When you go back and look at NLY in the TradeStops portfolio, clicking the NLY ticker symbol will show the chart with the adjusted entry price.
Clicking the “Corporate Actions” tab shows all the dividends paid and stock splits since owning the stock.
Adjusting the stocks for dividends, etc. is the default in TradeStops. If you decide to change this setting, you can do so by going into the “Settings” tab in the upper right-hand corner of the website and then changing the default under the “Alerts” tab.
We don’t recommend that you change this, but, as an individual investor, that is up to you.
Education Specialist, TradeStops