How does historical data get adjusted for dividends, exactly?

Question

I have read the questions and answers about historical data from sites like Google and Yahoo! Finance (which has been dis-improved, imo, in 2016.) My question is this: Exactly how are closing price data-points adjusted for dividends? What is the relationship between ex-div and pay date or dividends with respect to the adjustments these sites are making? If a historical price-point is adjusted for dividends does that mean that if a company pays 12 times per year, that the historical prices that are 13 months old have been adjusted for the 12 dividends that have happened since then? If one wants info about a stock from one point in time to another point in time without assuming the stock is still held, are these historical quotes "valid" at all?

"Back in the day" one used to be able to go to the library and look up the stock quotes for End of Day from a newspaper in the Reference section of the library and get the Actual Close Price, not adjusted for anything and when you went back 3 years later, the newspaper from that day would still have the same information on that date. These adjusted price-points may be useful for prospective investors, but they don't seem to be historical. I also find that these adjusted quotes are reported through sites like NASDAQ.com, which would seem to be a site with access to data that is closer to the source than Yahoo! or Google.

Answer 1

Various types of corporate actions will precipitate a price adjustment. In the case of dividends, the cash that will be paid out as a dividend to share holders forms part of a company's equity. Once the company pays a dividend, that cash is no longer part of the company's equity and the share price is adjusted accordingly.

For example, if Apple is trading at $101 per share at the close of business on the day prior to going ex-dividend, and a dividend of $1 per share has been declared, then the closing price will be adjusted by $1 to give a closing quote of $100.

Although the dividend is not paid out until the dividend pay date, the share price is adjusted at the close of business on the day prior to the ex-dividend date since any new purchases on or after the ex-dividend date are not entitled to receive the dividend distribution, so in effect new purchases are buying on the basis of a reduced equity.

It will be the exchange providing the quote that performs the price adjustment, not Google or Yahoo. The exchange will perform the adjustment at the close prior to each ex-dividend date, so when you are looking at historical data you are looking at price data that includes each adjustment.

Answer 2

If you download the historical data from Yahoo, you will see two different close prices. The one labeled 'Close' is simply the price that was quoted on that particular day. The one labeled 'Adj Close' is the close price that has been adjusted for any splits and dividends that have occurred after that date.

For example, if a stock splits 10:1 on a particular date, then the adjusted close for all dates prior to that split will have been divided by 10. If a dividend is paid, then all dates prior will have that amount subtracted from their adjusted quote. Using the adjusted close allows you to compare any two dates and see the true relative return.

Answer 3

According to Active Equity Management by Zhou and Jain:

When a stock pays dividend, the adjusted price in Yahoo makes the following adjustment:

Let T be the ex-dividend date (the first date that the buyers of a stock will not receive the dividend) and T-1 be the last trading day before T. All prices before T are adjusted by a multiplier (C_{T-1} - d_T)/C_{T-1}, where C_{T-1} is the close price at T-1 and d_T is the dividend per share.

This, of course means that the price before T decreases.

Answer 4

Comments from 2016 regarding data adjustment for dividends claimed Yahoo Finance no longer showed "Adj Close". I don't know about that then, but Yahoo Finance now shows "Adj Close":

The snapshot above shows a recent yahoo Finance page with "Adj Close" and also the "download" link".

Left click on “Download” to Download displayed time period as a *.csv file (ex: ivv.csv):

Opening the downloaded file shows

the first few lines of the file I downloaded (ivv.csv)

and the

Answer 5

I had both closing price and adjusted price of Apple showing the same amount after "download data" csv file was opened in excel.

It's frustrating. My last option was to get the dividend history of the stock and add back to the adjusted price to compute the total return for a select stock for the period.