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Author: TMFKnave Three stars, 500 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 8074  
Subject: At long last.... Dividends! Date: 1/17/2007 11:56 AM
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I'm happy to announce that CAPS will now be supporting dividends effective Tuesday. Any dividend payment occurring on January 16 or later will be factored into people's picks. We will not be retroactively applying dividends.

What is our overall philosophy?
We believe that dividends play an important part in investing and we want CAPS to allow for the reinvestment of dividends.

How are we going to adjust for dividends?
Anytime a stock reaches its ex-dividend date, we will be adjusting the start prices of all players who have an active pick in that stock. The adjustment will be a fractional reduction, and not a flat dollar subtraction. This prevents the cost-basis from ever reaching 0.

Okay, exactly how are we adjusting?
The exact formula is

New Start Price = Old Start Price * Reduction Factor

1
Where Reduction Factor = ------------------------------
(1 + Dividend / Post-div Price)

In plain English, the number in the denominator simply accounts for the extra fractional share you would have received had you repurchased shares at that moment.

So, suppose you bought CHEEZ at $15. Today, it went ex-dividend, paying a $.50 dividend, and the open price was $25. Here's how the calculation would work.

1
Reduction Factor = ------------------- = 0.980392157
(1 + .5 / 25)


New Start Price = 15 * 0.980392157 = 14.70588235

A quick check of the math shows that the pre-div and post-div returns are the same.

((25 + .5) / 15) - 1 = ((25) / 14.70588) – 1 = 70%

Which picks are eligible?
Any pick that was ACTIVE on the ex-dividend date will be eligible for a dividend adjustment. This includes ended picks that were closed after the ex-date.

How will we handle underperform picks?
Dividends affect start prices regardless of the direction of a pick. So, if you pick “underperform” on a dividend paying stock, you'll now have larger return to overcome because your start price is now lower. In addition, no longer will players be able to get unfair advantages by picking “underperform” on stocks with high dividend yields.

What about the S&P index? That doesn't include dividends!
We will now be using SPY as our index benchmark. This is a dividend-paying index fund that mirrors the S&P 500. All active picks have been converted to SPY prices and any new picks or newly closed picks will use SPY instead of the S&P 500. We will still display the S&P index value on the menu bar of the CAPS site because people are more familiar with this number, but keep in mind that the S&P index is not being used in the calculation of "S&P gain" in your scorecard.

Will SPY get a dividend adjustment, then?
Yes. We will adjust all active picks by the dividend amount paid for SPY. This adjustment will occur (as all CAPS dividends) on the SPY ex-dividend date.

How quickly will CAPS catch dividends?
Because we only get dividend info from our historical quote feed, there will currently be a one-day delay on all regular dividend payments. However, special one-time large dividends may be handled on the day of the dividend. Note: we realize a one-day delay is not ideal, and we are working to improve this.

How will I know my picks received a dividend?
Eventually, we will allow players to view the dividend history for their picks. But until we figure out the best way to display this data, we will simply be adjusting the start price with no notification. We know this is not the optimal solution, but we didn't want to delay the release of dividends any further.

Why aren't we retroactively applying dividends?
People having been playing CAPS with the understanding that dividends were not being calculated, so we think it would be unfair to go back and change the rules. There would be many closed picks that would flip from winning to losing (and vice-versa) as well as other picks that would drop below the 5% accuracy threshold. We felt a retroactive adjustment would be more unfair than if we applied historical dividends.

How can I help?
Thanks for offering! You can help us by letting us know if you think we failed to capture a dividend payment. If you keep a record of your start prices, you should see a downward adjustment the day after the ex-date. If you don't see such an adjustment, please let us know on the CAPS "Report Bugs/Feedback" page by selecting "Corporate Action."

Thanks to everyone who contributed to the discussion on dividends. And a big standing ovation to LoneIguana, who was instrumental in showing us the mathematically correct way to implement this.

Todd
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