A while back I wrote an article on Dividends and Backtesting which explains the reason behind the need to adjust stock price history whenever a stock goes ex-dividend.
A recent question I received asked does thinkorswim (TOS) adjust for dividends?
Initially I recalled that TOS did not adjust for dividends but then my advice to the questioner was around how they can verify for themselves whether or not any stock chart has been adjusted for dividends.
The specific symbol in question was EWZ.
Step 1
Look on the internet for the dividend history of EWZ.
Nasdaq has a good record of dividends and for EWZ that can be found here
Last EWZ ex-dividend date: 12/20/23
Step 2
Locate the last ex-dividend date on the chart and note the close price prior to ex-dividend and the close price after. Here’s what that looks like for EWZ in the ThinkOrSwim platform:
Step 3
Locate the same date on an EdgeRater chart that uses EdgeRater Premium Data as its data provider:
Step 4
Compare the close price on the day prior to ex-dividend date with the EdgeRater chart. If it doesn’t match then the chart has not been adjusted for dividends.
Observations
In the above example you can see that the ex-dividend date close price is the same on both charts. However, the charts start to diverge the further back you go. The more dividends that you meet along the journey backwards, the more the charts will diverge. It’s quite possible that if a stock/etf has a lot of high value dividends, the early parts of the chart will be significantly different on the price axis.
For example, on the EdgeRater chart (which has been adjusted for dividends) the close price of EWZ 10 years ago was approximately $29, whereas on the ThinkOrSwim chart the close price was approximately $42.
What does it all mean?
As explained in the Dividends and Backtesting article, whenever you are backtesting you want to use dividend adjusted data, otherwise the returns that you see in your simulated trades will not account for the fact that the holder of the stock on the ex-dividend date actually got paid a dividend amount. In the above example, thinkorswim is not a backtesting platform and therefore they do not need to adjust for dividends. Of course they do adjust for splits otherwise you would see huge gaps in the charts.
EdgeRater is primarily a backtesting platform and so it’s important that the data is adjusted for dividends to make sure that your trade simulations produce realistic returns.