Ask Mike:
Do your stop loss settings account for ex-div dates?

Question:

Hello Mike,

My question is about how you adjust stop losses prior to a dividend being declared.

My broker automatically reduces stops, unless I specifically order otherwise, on ETFs and stocks.

Are your new stops in the Portfolio Tool where you want them to be after the reduction by the dividend amount? If so, I would not move the stops myself, but instead let my broker do it automatically. Same difference, right?

Since there are a number of ETFs in the Market Trends Portfolio now too, it will be helpful to know when a downward stop adjustment is for ex-dividend purposes versus other reasons.

My broker also offers another option where I could set a 'Do Not Lower' condition on all my stops and move them myself based on your emails.

Last thought - Are the stops in the Stock Analyzer similarly adjusted based on them trading ex-dividend in the upcoming week?

Happy Holidays,

Pat McD from Madison, WI

Mike's Response:

Hi Pat,

Most brokers (although certainly not all) automatically reduce stops by the amount of a declared dividend prior to the market open on the ex-dividend day. I try to keep my stops in the portfolios adjusted with the dividend included. This means, in theory, my stops are already ex-dividend adjusted.

However, there are times that this is impossible to do. This week is a case in point.

Several of the ETFs went ex-div this week, well ahead of previously forecasted ex-div dates. In addition, many of them declared dividends significantly higher than previously published amounts.

Normally, this is not a major concern because my stops are generally far enough below most dividends to easily absorb and fall off in price on the ex-div date. After all, the normal stop loss setting has the volatility of previous ex-div dates factored into the calculation.

However, I have been steadily increasing my stop loss settings in anticipation of a potential major correction in the market. So, my stops were getting very close to the actual price of the positions. In some cases, these stops would have been triggered on the ex-div dates.

I had never seen the kinds of dividend activity in the ETFs we saw this past week. Certainly, the lesson I learned is not to trust forecasted ex-div dates and dividend declarations when it comes to ETFs and the end of the year. In retrospect, I should have lowered the stops on all of my ETFs this week just to be safe. That also puts a bit more risk into the strategy, especially if the correction had occurred this week.

Fortunately, the correction did not occur this week.

As for the Analyzer database, we do not manually adjust the stops for dividends. Stock price adjustments for dividends are a part of the historical pricing volatility. So, indirectly, the standard stop loss has dividend payouts included in the calculation.

However, there are one-time dividends and unusual distributions that are not a part of historical volatility and probably should be included in the stop loss calculation. In those cases, it would be important to have the stops lowered in those instances. I will see what we can do to include that feature in a future release of the Analyzer.

In the meantime, the safest plan is to continue to let your broker adjust your stops automatically. Then, the day after the ex-div date, look at the portfolio tool and to see how I have adjusted my stops.

Have a Merry Christmas!

Mike