Selling a mutual fund investment (VTSAX) right before Record date - what happens to dividend that would have been paid?

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mariezzz
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Selling a mutual fund investment (VTSAX) right before Record date - what happens to dividend that would have been paid?

Post by mariezzz »

VTSAX pays dividends quarterly.
Record date for 3rd quarter is about 9.23.
https://investor.vanguard.com/mutual-fu ... ions/vtsax

If you sell VTSAX just a few days before the record date, do you just forfeit the dividend that would have been paid had you not sold? Or do you get a pro-rated dividend based on the number of days in the quarter you held VTSAX?

And the reverse: what happens if you purchase VTSAX just a few days before the record date. Is the dividend you're paid pro-rated based on the number of days you held the asset?

I specify VTSAX, but assume the answers would generalize to any equity fund (or no?). And would the answers generalize to bond funds as well?
000
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Re: Selling a mutual fund investment (VTSAX) right before Record date - what happens to dividend that would have been pa

Post by 000 »

You don't get the dividend. There is no pro-rated payment. Instead, the NAV of the fund drops on the date of the dividend. So the dividend payout is reflected in the fund NAV. This is how all ETFs, stocks, and most mutual funds work.

But some Vanguard bond / money market funds do pay out pro-rated dividends. Other fund families may differ.
alex_686
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Re: Selling a mutual fund investment (VTSAX) right before Record date - what happens to dividend that would have been pa

Post by alex_686 »

Understand that dividends are about generating “reportable transactions” for the IRS. They are purely accounting transactions. No economic impact.

To simplify, consider that the dividend is incorporated in the fund’s NAV. The fund’s NAV will fall by the exact amount of the dividend.
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mariezzz
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Re: Selling a mutual fund investment (VTSAX) right before Record date - what happens to dividend that would have been pa

Post by mariezzz »

alex_686 wrote: Mon Sep 13, 2021 7:40 pm Understand that dividends are about generating “reportable transactions” for the IRS. They are purely accounting transactions. No economic impact.

To simplify, consider that the dividend is incorporated in the fund’s NAV. The fund’s NAV will fall by the exact amount of the dividend.
I've heard this before, but I've never really understood it as far as 'funds' because I've never really seen it when I look at the daily values. I understand what you're saying, but I haven't felt like I've seen evidence when I look at daily prices. According to this, you should see fund prices tend to fall on the day after a dividend is paid but that doesn't seem to be the case. (Of course, the fall i value caused by the dividend payment would be offset by any market gains (or increased by any market losses) that day, but the trend would be for a decrease in value, and I just haven't felt I've seen that).

The reason why I specified 'mutual fund' is because I kind of decided the fall in NAV either isn't as obvious (for some unknown reason), or it's more complicated. If there's some explanation out there that will make this clearer, please link.
sycamore
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Re: Selling a mutual fund investment (VTSAX) right before Record date - what happens to dividend that would have been pa

Post by sycamore »

000 wrote: Mon Sep 13, 2021 7:39 pm You don't get the dividend. There is no pro-rated payment. Instead, the NAV of the fund drops on the date of the dividend. So the dividend payout is reflected in the fund NAV. This is how all ETFs, stocks, and most mutual funds work.

But some Vanguard bond / money market funds do pay out pro-rated dividends. Other fund families may differ.
Indeed, you would get "pro-rated" payments for funds that declare dividends daily so you "earn" a bit of payout every day that you're an owner of record.

Some bond funds only declare dividends monthly. Some funds like VTSAX declare it quarterly. I'm guessing there might even be some funds that declare annually?
000
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Re: Selling a mutual fund investment (VTSAX) right before Record date - what happens to dividend that would have been pa

Post by 000 »

sycamore wrote: Mon Sep 13, 2021 7:57 pm I'm guessing there might even be some funds that declare annually?
Many Fidelity funds for example. I actually would prefer annual distributions in a taxable account.
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Re: Selling a mutual fund investment (VTSAX) right before Record date - what happens to dividend that would have been pa

Post by tibbitts »

mariezzz wrote: Mon Sep 13, 2021 7:55 pm
alex_686 wrote: Mon Sep 13, 2021 7:40 pm Understand that dividends are about generating “reportable transactions” for the IRS. They are purely accounting transactions. No economic impact.

To simplify, consider that the dividend is incorporated in the fund’s NAV. The fund’s NAV will fall by the exact amount of the dividend.
I've heard this before, but I've never really understood it as far as 'funds' because I've never really seen it when I look at the daily values. I understand what you're saying, but I haven't felt like I've seen evidence when I look at daily prices. According to this, you should see fund prices tend to fall on the day after a dividend is paid but that doesn't seem to be the case. (Of course, the fall i value caused by the dividend payment would be offset by any market gains (or increased by any market losses) that day, but the trend would be for a decrease in value, and I just haven't felt I've seen that).

The reason why I specified 'mutual fund' is because I kind of decided the fall in NAV either isn't as obvious (for some unknown reason), or it's more complicated. If there's some explanation out there that will make this clearer, please link.
You must not own the "right" funds. I checked the value of my Fidelity funds last week: the market had gone down a fraction of a percent and more like 5% was missing from my fund compared to the day before. Of course I figured it was just a distribution and sure enough it was a dividend plus long and short capital gains. The next morning the price reflected the reinvestment and I was only down the expected amount.
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Re: Selling a mutual fund investment (VTSAX) right before Record date - what happens to dividend that would have been pa

Post by placeholder »

mariezzz wrote: Mon Sep 13, 2021 7:55 pm I've heard this before, but I've never really understood it as far as 'funds' because I've never really seen it when I look at the daily values.
There's a reason there's a sticky thread on Theory labeled: [Why did my fund suddenly drop in value?]

viewtopic.php?f=10&t=129142

If it were the case that the nav didn't rise and fall you could "swoop in" and buy the fund right before the dividend then sell it right after for free money.
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Re: Selling a mutual fund investment (VTSAX) right before Record date - what happens to dividend that would have been pa

Post by mariezzz »

placeholder wrote: Mon Sep 13, 2021 8:16 pm
mariezzz wrote: Mon Sep 13, 2021 7:55 pm I've heard this before, but I've never really understood it as far as 'funds' because I've never really seen it when I look at the daily values.
There's a reason there's a sticky thread on Theory labeled: [Why did my fund suddenly drop in value?]

viewtopic.php?f=10&t=129142

If it were the case that the nav didn't rise and fall you could "swoop in" and buy the fund right before the dividend then sell it right after for free money.
Thanks - I've read that in the past (and this, which is useful: https://www.bogleheads.org/wiki/Dividend), and understand the concept but just don't feel like I've seen it reflected in fund prices (in my case, equity funds tend to be VIIIX or VTSAX).

I just initiated a rollover from TIAA to Fidelity of all my assets in a 401k (100% VTSAX). Just submitted the signed request. Money could get into Fidelity before the record date if paperwork is in order & TIAA sends check to Fidelity (to be received within 7 business days, per TIAA).
Last edited by mariezzz on Mon Sep 13, 2021 8:56 pm, edited 2 times in total.
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Re: Selling a mutual fund investment (VTSAX) right before Record date - what happens to dividend that would have been pa

Post by placeholder »

You have to actually compare the fund to its index because normal market movements can mask the effects of the distribution so the fund might not drop but rather didn't go up as much as it would have.
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Re: Selling a mutual fund investment (VTSAX) right before Record date - what happens to dividend that would have been pa

Post by iamblessed »

mariezzz wrote: Mon Sep 13, 2021 7:36 pm VTSAX pays dividends quarterly.
Record date for 3rd quarter is about 9.23.
https://investor.vanguard.com/mutual-fu ... ions/vtsax

If you sell VTSAX just a few days before the record date, do you just forfeit the dividend that would have been paid had you not sold? Or do you get a pro-rated dividend based on the number of days in the quarter you held VTSAX?

And the reverse: what happens if you purchase VTSAX just a few days before the record date. Is the dividend you're paid pro-rated based on the number of days you held the asset?

I specify VTSAX, but assume the answers would generalize to any equity fund (or no?). And would the answers generalize to bond funds as well?
The guy that buys it from you gets the dividend. But since the fund price will drop he gets no profit. I needed to get my income up one year and did this. I bought right before the record date. My income went up on paper but not in real life.
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Re: Selling a mutual fund investment (VTSAX) right before Record date - what happens to dividend that would have been pa

Post by PhysicianOnFIRE »

Be happy that you didn't take the forced distribution and accompanying taxation.
alex_686
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Re: Selling a mutual fund investment (VTSAX) right before Record date - what happens to dividend that would have been pa

Post by alex_686 »

sycamore wrote: Mon Sep 13, 2021 7:57 pm Indeed, you would get "pro-rated" payments for funds that declare dividends daily so you "earn" a bit of payout every day that you're an owner of record.
While this is a useful way to look at things it is technically incorrect. You actually get a dividend for the income for the days held.

A daily distributing fund goes ex-div every day. For example, the fund would go ex-div today with a payment date of 9/30. Then tomorrow the fund would go ex-div again with a payment date of 9/30.

If you close out of the fund early then they pay out out early.
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Re: Selling a mutual fund investment (VTSAX) right before Record date - what happens to dividend that would have been pa

Post by Lou354 »

mariezzz wrote: Mon Sep 13, 2021 7:55 pm I've heard this before, but I've never really understood it as far as 'funds' because I've never really seen it when I look at the daily values. I understand what you're saying, but I haven't felt like I've seen evidence when I look at daily prices. According to this, you should see fund prices tend to fall on the day after a dividend is paid but that doesn't seem to be the case. (Of course, the fall i value caused by the dividend payment would be offset by any market gains (or increased by any market losses) that day, but the trend would be for a decrease in value, and I just haven't felt I've seen that).
I'm not sure what daily values you're looking at. When a fund distributes a dividend you should see that the price per share of the fund in question has dropped and that you now own more shares of that fund (assuming you have opted for automatic reinvestment of dividends). There won't be a change in the value of your investment in that fund (other than daily market fluctuation), which is the whole point.
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Re: Selling a mutual fund investment (VTSAX) right before Record date - what happens to dividend that would have been pa

Post by TropikThunder »

mariezzz wrote: Mon Sep 13, 2021 7:55 pm I've heard this before, but I've never really understood it as far as 'funds' because I've never really seen it when I look at the daily values. I understand what you're saying, but I haven't felt like I've seen evidence when I look at daily prices. According to this, you should see fund prices tend to fall on the day after a dividend is paid but that doesn't seem to be the case. (Of course, the fall i value caused by the dividend payment would be offset by any market gains (or increased by any market losses) that day, but the trend would be for a decrease in value, and I just haven't felt I've seen that).
You’re on the right track the change in NAV based on the dividend is mostly masked by market gains and losses. When you say “the trend would be for a decrease in value”, that’s counteracted by the market’s trend overall for an increase in value - most of the time the market goes up.

The easiest way to see the effect is to compare the daily change between either:

- a mutual fund (VTSAX) and ETF (VTI) that track the same index but pay dividends on different days; the one that pays a dividend that day will show less gain (or more loss) than the one that doesn’t)

- two mutual funds that track the same index but pay dividends on different days (VTIAX and FXAIX are both S&P 500 funds but VTIAX distributes in Mar and FXAIX distributes in Apr for example), or

- a mutual fund (VTSAX) and the index it tracks (CSRP Total Market); on ex-dividend day, the fund will reflect market gain/loss - distribution while the index itself will only reflect market gain/loss
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Re: Selling a mutual fund investment (VTSAX) right before Record date - what happens to dividend that would have been pa

Post by dbr »

The standard deviation of daily returns is about the same size or larger than the value of a quarterly dividend.
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Re: Selling a mutual fund investment (VTSAX) right before Record date - what happens to dividend that would have been pa

Post by GP813 »

This might be a good thread to ask this question.

We own a municipal bond fund(VWALX) from Vanguard and I received a prorated distribution, where the monthly payment was lower than I calculated. I bought into the fund in the middle/late part of the month but before the record date. Is the difference dividend vs interest for the equity vs bond funds?
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Re: Selling a mutual fund investment (VTSAX) right before Record date - what happens to dividend that would have been pa

Post by alex_686 »

GP813 wrote: Tue Sep 14, 2021 12:34 pm We own a municipal bond fund(VWALX) from Vanguard and I received a prorated distribution, where the monthly payment was lower than I calculated. I bought into the fund in the middle/late part of the month but before the record date. Is the difference dividend vs interest for the equity vs bond funds?
Yes and no.

The sole purpose of dividends is for tax reporting. Keep your mind focused on that. Anything else is going to be a distraction that will lead you down a false path.

Each calendar year the fund, by law, must have a distributing dividend transaction reflecting all income from the fund. Well, not quite all. And "distributing" is a bad word because the fund doesn't actually have to distribute anything.

It does not matter if you held the fund for 1 day or for 365 days. The dividend is the same for everybody.

Anyways, income can have different characters. Ordinary, short term cap gains, and long term cap gains. Each different character gets its own different dividend.

Muni bonds tend to skew towards ordinary. Tend. If they had significant ST or LT then they would need to distribute that as well.
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Re: Selling a mutual fund investment (VTSAX) right before Record date - what happens to dividend that would have been pa

Post by grabiner »

GP813 wrote: Tue Sep 14, 2021 12:34 pm This might be a good thread to ask this question.

We own a municipal bond fund(VWALX) from Vanguard and I received a prorated distribution, where the monthly payment was lower than I calculated. I bought into the fund in the middle/late part of the month but before the record date. Is the difference dividend vs interest for the equity vs bond funds?
Most bond funds accrue dividends daily, prorating the payment. If a bond pays a $365 annual coupon, the fund can pay $1 for every day you hold the bond. (Bond ETFs do not work this way; the full dividend is paid out if you hold the ETF on the record date.) There is a minor tax advantage for accruing dividends this way with muni funds; if the fund doesn't accrue dividends daily, any capital loss on a share held less than six months must be reduced by the tax-exempt dividends on that share.

Stock funds cannot easily do this because dividends are not fixed. If a stock has historically paid a $3 quarterly dividend, it might cancel the March dividend, or raise it to $4, or leave it at $3 but add a $6 special dividend. In any of these cases, paying a $1 accrued dividend for January would be wrong.
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Re: Selling a mutual fund investment (VTSAX) right before Record date - what happens to dividend that would have been pa

Post by GP813 »

grabiner wrote: Tue Sep 14, 2021 8:36 pm
GP813 wrote: Tue Sep 14, 2021 12:34 pm This might be a good thread to ask this question.

We own a municipal bond fund(VWALX) from Vanguard and I received a prorated distribution, where the monthly payment was lower than I calculated. I bought into the fund in the middle/late part of the month but before the record date. Is the difference dividend vs interest for the equity vs bond funds?
Most bond funds accrue dividends daily, prorating the payment. If a bond pays a $365 annual coupon, the fund can pay $1 for every day you hold the bond. (Bond ETFs do not work this way; the full dividend is paid out if you hold the ETF on the record date.) There is a minor tax advantage for accruing dividends this way with muni funds; if the fund doesn't accrue dividends daily, any capital loss on a share held less than six months must be reduced by the tax-exempt dividends on that share.

Stock funds cannot easily do this because dividends are not fixed. If a stock has historically paid a $3 quarterly dividend, it might cancel the March dividend, or raise it to $4, or leave it at $3 but add a $6 special dividend. In any of these cases, paying a $1 accrued dividend for January would be wrong.

That makes sense, thanks for the explanation.
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Re: Selling a mutual fund investment (VTSAX) right before Record date - what happens to dividend that would have been pa

Post by alex_686 »

grabiner wrote: Tue Sep 14, 2021 8:36 pm Most bond funds accrue dividends daily, prorating the payment. If a bond pays a $365 annual coupon, the fund can pay $1 for every day you hold the bond. (Bond ETFs do not work this way; the full dividend is paid out if you hold the ETF on the record date.) There is a minor tax advantage for accruing dividends this way with muni funds; if the fund doesn't accrue dividends daily, any capital loss on a share held less than six months must be reduced by the tax-exempt dividends on that share.

Stock funds cannot easily do this because dividends are not fixed. If a stock has historically paid a $3 quarterly dividend, it might cancel the March dividend, or raise it to $4, or leave it at $3 but add a $6 special dividend. In any of these cases, paying a $1 accrued dividend for January would be wrong.
This is entirely wrong. ETF or mutual fund, bond or stock, all funds work exactly the same way. See my above post.

Please ask if you have any questions. This was my day job.
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Re: Selling a mutual fund investment (VTSAX) right before Record date - what happens to dividend that would have been pa

Post by grabiner »

alex_686 wrote: Tue Sep 14, 2021 9:00 pm
grabiner wrote: Tue Sep 14, 2021 8:36 pm Most bond funds accrue dividends daily, prorating the payment. If a bond pays a $365 annual coupon, the fund can pay $1 for every day you hold the bond. (Bond ETFs do not work this way; the full dividend is paid out if you hold the ETF on the record date.) There is a minor tax advantage for accruing dividends this way with muni funds; if the fund doesn't accrue dividends daily, any capital loss on a share held less than six months must be reduced by the tax-exempt dividends on that share.

Stock funds cannot easily do this because dividends are not fixed. If a stock has historically paid a $3 quarterly dividend, it might cancel the March dividend, or raise it to $4, or leave it at $3 but add a $6 special dividend. In any of these cases, paying a $1 accrued dividend for January would be wrong.
This is entirely wrong. ETF or mutual fund, bond or stock, all funds work exactly the same way. See my above post.

Please ask if you have any questions. This was my day job.
And I don't question you on the policy. The financial picture is equivalent regardless of when dividends are paid out; if a fund receives a dividend, that dividend goes to the shareholders in either fund price or payout.

My comment is about the practice. Most bond mutual funds accrue dividends daily and pay out prorated dividends, while stock mutual funds don't. I don't think there is any rule which says that stock funds cannot accrue dividends daily, but the variability of dividends makes it less practical. (Another reason is that most investors don't hold stock funds for income, so paying out prorated dividends monthly is not as attractive for investors.)
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Re: Selling a mutual fund investment (VTSAX) right before Record date - what happens to dividend that would have been pa

Post by alex_686 »

grabiner wrote: Tue Sep 14, 2021 9:08 pm And I don't question you on the policy. The financial picture is equivalent regardless of when dividends are paid out; if a fund receives a dividend, that dividend goes to the shareholders in either fund price or payout.

My comment is about the practice. Most bond mutual funds accrue dividends daily and pay out prorated dividends, while stock mutual funds don't. I don't think there is any rule which says that stock funds cannot accrue dividends daily, but the variability of dividends makes it less practical. (Another reason is that most investors don't hold stock funds for income, so paying out prorated dividends monthly is not as attractive for investors.)
We may be getting a bit technical, and I might let this slide but you are suggesting that ETFs and mutual funds, equity and bond funds operate differently. This is false. A hint is that bond fund's daily income is also variable. Not as variable as stock funds, but still variable. Also, bond funds almost always hold assets that are technically equities. As such "pro rated" dividends are out.

So let us run this from front to back.

All public funds operate under the same regulations and accounting principle. No exceptions.

All funds work on accrual accounting. i.e., you book income to the General Ledger when the economic activity occurs. Generally you don't care when cash is received. For stocks this is on ex-div date. For bonds you accrue income daily. A fraction of the coupon or discount is added to the income ledger every day. As such it is reflected in the fund's NAV.

Funds have to "distribute" (see my prior post) at least once every calendar year. A fund may distribute income either yearly, quarterly, monthly, or daily. Or by the whim of the fund sponsor. It really does not matter.

I think you are confusing the daily distributing funds with "pro rata". From the outside they kind of look similar. With a daily distributing fund you distribute the income daily. If you owned a fund on 9/14 you get the income from 9/14. Period. No "pro rata" about it. You get 100% of the income for that day. What confuses many people is that while the fund goes ex-div daily it has a monthly payout. So that 9/14 dividend you earned will be paid out on 9/30 along with all of the other dividends you earned in September.

Daily disturbing funds tend to be short term bond funds. They don't have to be. Equity funds could be daily disturbing funds. No reason why they can't.
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Re: Selling a mutual fund investment (VTSAX) right before Record date - what happens to dividend that would have been pa

Post by exodusNH »

mariezzz wrote: Mon Sep 13, 2021 8:26 pm
placeholder wrote: Mon Sep 13, 2021 8:16 pm
mariezzz wrote: Mon Sep 13, 2021 7:55 pm I've heard this before, but I've never really understood it as far as 'funds' because I've never really seen it when I look at the daily values.
There's a reason there's a sticky thread on Theory labeled: [Why did my fund suddenly drop in value?]

viewtopic.php?f=10&t=129142

If it were the case that the nav didn't rise and fall you could "swoop in" and buy the fund right before the dividend then sell it right after for free money.
Thanks - I've read that in the past (and this, which is useful: https://www.bogleheads.org/wiki/Dividend), and understand the concept but just don't feel like I've seen it reflected in fund prices (in my case, equity funds tend to be VIIIX or VTSAX).

I just initiated a rollover from TIAA to Fidelity of all my assets in a 401k (100% VTSAX). Just submitted the signed request. Money could get into Fidelity before the record date if paperwork is in order & TIAA sends check to Fidelity (to be received within 7 business days, per TIAA).
The dividend amount is often masked by normal daily fluctuations. If a fund has a 1.5% yearly dividend, it only pays out 1/12th or 1/4th of that amount monthly/quarterly. You won't notice 0.125% almost ever and often even 0.375% given what the market does daily.
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Re: Selling a mutual fund investment (VTSAX) right before Record date - what happens to dividend that would have been pa

Post by mariezzz »

PhysicianOnFIRE wrote: Tue Sep 14, 2021 8:46 am Be happy that you didn't take the forced distribution and accompanying taxation.
It's in a retirement account, so no taxation until RMDs start.

The answers in this thread have been helpful (thanks), as has the technical discussion with grabiner and alex!
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