What is dividend bias and how are we removing it?

Jeffrey Cohen, Wed, March 3, 2021

First, thank you to our newest client for pointing this out on Monday.  We had not seen, nor understood it, and we are grateful for the feedback.

So, what is a dividend bias and how do you get it?  Is it contagious? Can you cure it?

What is it?  When we analyze stocks we use the adjusted close data.  It reduces the price of certain stocks that either paid a dividend or performed a stock split.  The bigger the dividend (as a % of the closing price), the larger the reduction in prices.  This reduces the BETA of the dividend paying stocks (more for larger dividends).

This means that for our efficient portfolios, we were picking fewer dividend paying stocks than we should have picked.  If we pick 'inefficient' portfolios, then those portfolios would have more dividend paying stocks than they should.

We found it because our client wondered why the proportion of dividend paying stocks was different than expected in our chosen portfolio.

You can cure it.  We just did (still in testing, but an exciting development).  We will be adjusting the expected return calculations by a dividend percentage adjustment.  This is not a perfect fix, as the math requires us to adjust both the variance and the expected return...but this should work well and be feasible to implement.

We will share more about this, and I can almost imagine this going into a future academic paper.  Let us know if you have questions.

Regards,
Jeffrey Cohen