Dividends are payments made by a corporation to its shareholder members. It is the portion of corporate profits paid out to stockholders. When a corporation earns a profit or surplus, that money can be put to two uses: it can either be re-invested in the business (called retained earnings), or it can be paid to the shareholders as a dividend. Many corporations retain a portion of their earnings and pay the remainder as a dividend. In other words, payment of a dividend is based on many factors and can only be decided by the corporation issuing the stock.
The decision to invest in dividend paying stocks versus stocks that do not pay dividends is uncertain at best. There are many reasons to support either position, as well as tax implications for both the issuing corporation and the stockholder.
- Insight can be found in the forum: What is so great about dividends? Alot of misinformation?
Mutual fund dividends
When you are paid a dividend from a mutual fund, it is not a payment "for keeping your money in the fund for a year," but rather it is a distribution to you of your share of interest and dividends paid to the fund by the assets held in the fund. The fund is required to make such a distribution, and the fund is required to decrease the net asset value (NAV) accordingly, as after the payout the fund holds less wealth. This is true of most equity funds, but not of bond funds.
Your interest in holding a fund is the total return on your investment, which is increase in NAV plus value of distributions. If the fund NAV at the end of the year, after distributions, is actually less than the fund NAV at the beginning of the year, then the capital gain return for that year may have been negative. If you add to that the total of distributions received, the result may still be negative, or it may be positive.
It is generally the case that both stock and bond funds have an expectation of positive total return in a year, but actual results in a year can vary widely, and do include negative total returns in some years.
Dividend distributions are accumulated in the fund's NAV all year long. Then when paid, the fund is reduced by that dividend amount. (This is not true of most Vanguard bond funds, as noted above. See Net asset value (NAV) for more detail.) If dividends are reinvested, then you simply receive additional shares that equal the dividend amount times the number of shares you already owned.
The distributions can be considered as a bookkeeping tool to get stock dividends and bond interest income off the books and out to investors either by reinvestment in additional shares or as a cash payment.
For example:You own 500 shares at $11 per share at year-end, for a total worth of $5,500. There is a $1 per share dividend. Therefore, net of accumulated dividends in the fund, your fund is worth $10 per share. Assuming dividends are reinvested, you'll get $500 ($1 x 500 shares) reinvested in the fund. $500 / $10 per share = 50 additional shares. Now you own 550 shares at $10 each, which equals your original $5,500.
Except for taxes in a taxable account, there is no reason to "time" the dividend in a mutual fund.
Dividend distributions and fund prices
If your fund is paying out a dividend and/or capital gains distribution, the NAV of the fund will drop by the per share amount of the distributions on the payment date (sometimes quarterly, often annually). The investor's economic position is not changed by the distributions, regardless of whether the distributions are re-invested in the fund or taken in cash. Substantial drops in NAV from distributions most often occur in December, when many funds are paying annual dividend and capital gains distributions, especially if the distributions are large.
- ↑ Dividend, on Wikipedia
- ↑ Black, Fischer. "The Dividend Puzzle." Journal of Portfolio Management, 2 (1976), pp. 58., on Google Books.
- ↑ Net asset value
- ↑ I don't understand how i made any money 2030 fund, forum discussion
- Dividends- exactly where do they come from, forum discussion.
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Wiki article link: [url=http://www.bogleheads.org/wiki/Dividend]Dividend[/url]