Hello monkeys,
So I'm working on a very rudimentary econometric paper and regression project for class and am using a selected stock's return and measuring it against sector ETFs in a time series model in a very base sort of CAPM model way.
The problem I'm having is many of these ETFs pay dividends and I'm just wondering how (if I need at all), to account for these dividend payments in the returns and performance of the ETF returns. Any help would be greatly appreciated.
Thanks in advance
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You obviously need to compare like-for-like. If you include dividends (and reinvestment?) in the stock return then you need to do the same for the ETF.
Holding Period Return = (P1+D-P0)/P0 Where P1 = the price at the end of the holding period P0 = the price at the beginning of the holding period D = The dividend paid during the holding period
Use returns calculated this way in your time series.
@Asatar: My stock does not yield dividends, but all ETFs that I searched representing sectors had dividends. Plus, my main problem with the dividends is also how to compare securities with different dividend yields aside from their capital gains.
@Boothorbust: I'm not sure I understand your method totally. I have month end returns going back approx 5 years on one security which yields no dividend vs 4 ETFs (tech, materials, energy, etc) that all yield dividends. I did a little research, with ex dividend dates etc, but just am not sure how to incorporate them into my overall returns. Seems that I should though, as apparently on ex div dates, the security price is adjusted downwards to account for the dividend payment (assuming cash), since it is dilutive of the company value (if this makes any sense?).
I will try your model though and see if there are any substantial changes to my returns and my fit.
Thanks to both of you!
Probably the easiest way is to assume a base investment of $100,000 (or any nice amount) in each security and then calculate the value gains on that, taking into account dividends and reinvestment for Total Return. What Boothorbust quoted you was the basic formula for Holding Period Yield.
Following his suggestion, if you are doing monthly returns you simply do the following:
(Price at end of month + dividends per share paid during month - price at start of month) / Price at start of month.
This will give you your monthly return data along with dividends (but will NOT include reinvestment of dividends). Security prices fall on ex-dividend dates to reflect the fact that future cash flows to the security are now lower by 1 dividend payment.
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