I agree dividends are valuable.
I agree it's nice to have a dividend once in a while, and yes they compound if reinvested, and they should be reinvested.
In fact, I think I agree with almost everything you say except how to evaluate systems.
I have yet to see a stock trading system that flags a special buy signal because a dividend is going to be paid on a specific date. I will say however that a really tuned in options trader will sometimes request an assignment of somebody's stock so that he can collect the dividend instead of the options owner. And I'm sure that in some stable markets there are stock traders that will try to time a trade to grab a particularly juicy dividend, but he'll have to contend with the raised Bid/Ask at the opening of the payment qualifying date (which was raised on purpose to counter such intentions). I was surprised to have that happen to me once in the last 27 years as one of my options trades was assigned before expiration.
All I'm suggesting is that dividends don't play a part in trading system development of the typical trader or in trading system comparison. Does your system have a special dividend signal? No.
A system should be evaluated on how it behaves as affected by stock price fluctuations on a daily basis, not a typically small isolated event every 90 days.
In case you still don't understand my point, think about the following example:
Imagine an ETF that trades exactly (penny for penny) like SPY but does not pay a dividend (because that goes into the pockets of the outfit running the ETF). I'll call the new ETF SPA.
You trade your system on SPY and your account grows by 300% at the end of a very long test period and all your dividends were reinvested. A competitor trades their system using SPA and gets the same exact result as you got by trading SPY, 300%. Which system is the best system?
The system that traded SPA is significantly better. That trader ended up with the same cash in his account as you did, but his account wasn't propped up by a dividend payment every 90 days.
That's all I was trying to say. Remove the dividend effect when comparing systems.
AI
