Bond fund dividend accrual-daily vs monthly

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duckcalldan
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Bond fund dividend accrual-daily vs monthly

Post by duckcalldan » Tue Apr 18, 2017 2:00 pm

I recently rolled over my 401K to a Fidelity IRA. The lion's share of my 401K was a BlackRock Bond Fund (BMOAX). The withdrawal and payout to Fidelity was the 16th of the month. I was expecting a pro-rated dividend for the half a month I held this fund, similar to what I experience when I sell a Vanguard bond fund. But I didn't received a partial month dividend. It would have been around $500, not chump change.

Looking at the Bogleheads' Wiki at http://www.bogleheads.org/wiki/Manageme ... Bond_funds, it is implied that most bond fund dividends are accrued daily and paid monthly. But I can't find any information on BlackRock's website. Can you help?

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Re: Bond fund dividend accrual-daily vs monthly

Post by kolea » Tue Apr 18, 2017 3:26 pm

It is probably reflected in the price. As the fund accrues interest payments throughout the month from all of the bonds it holds, its NAV goes up correspondingly. When the fund makes a distribution, the NAV should go down by the amount of the distribution. So whatever you sold it for, the NAV (and hopefully the price) accounted for all the coupons the fund had gotten but not distributed.
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TropikThunder
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Re: Bond fund dividend accrual-daily vs monthly

Post by TropikThunder » Tue Apr 18, 2017 7:37 pm

kolea wrote:It is probably reflected in the price. As the fund accrues interest payments throughout the month from all of the bonds it holds, its NAV goes up correspondingly. When the fund makes a distribution, the NAV should go down by the amount of the distribution. So whatever you sold it for, the NAV (and hopefully the price) accounted for all the coupons the fund had gotten but not distributed.
That's not how it works for daily accrual funds like VBMFX Vanguard Total Bond: "The Fund’s income dividends are declared daily and distributed monthly." For daily accrual funds, you are due the interest accumulate during the days (partial month) you held the fund up to when you sold it. For monthly funds, the holder of the fund on the dividend record date gets the dividend (like equity funds).
viewtopic.php?t=170982

I looked over the BMOAX prospectus and it doesn't appear to be a daily accrual fund, but I did not find an explicit statement one way or the other.

duckcalldan
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Re: Bond fund dividend accrual-daily vs monthly

Post by duckcalldan » Thu Apr 20, 2017 2:01 pm

TropikThunder wrote:
kolea wrote:It is probably reflected in the price. As the fund accrues interest payments throughout the month from all of the bonds it holds, its NAV goes up correspondingly. When the fund makes a distribution, the NAV should go down by the amount of the distribution. So whatever you sold it for, the NAV (and hopefully the price) accounted for all the coupons the fund had gotten but not distributed.
That's not how it works for daily accrual funds like VBMFX Vanguard Total Bond: "The Fund’s income dividends are declared daily and distributed monthly." For daily accrual funds, you are due the interest accumulate during the days (partial month) you held the fund up to when you sold it. For monthly funds, the holder of the fund on the dividend record date gets the dividend (like equity funds).
viewtopic.php?t=170982

I looked over the BMOAX prospectus and it doesn't appear to be a daily accrual fund, but I did not find an explicit statement one way or the other.
Per BlackRock and my 401k provider, BMOAX is a daily accrual fund but, unlike Vanguard's bond funds, pays dividends monthly out of the underlying fund. That is, the daily accrual is reflected in the NAV of the fund rather than have these dividends be in a separate bucket. So, when my fund was sold, the prorated dividend was paid out in the form of a slightly higher NAV. Does this sound correct? It seems like an outlier compared to any other bond fund.

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oldcomputerguy
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Re: Bond fund dividend accrual-daily vs monthly

Post by oldcomputerguy » Thu Apr 20, 2017 2:17 pm

duckcalldan wrote:
TropikThunder wrote:
kolea wrote:It is probably reflected in the price. As the fund accrues interest payments throughout the month from all of the bonds it holds, its NAV goes up correspondingly. When the fund makes a distribution, the NAV should go down by the amount of the distribution. So whatever you sold it for, the NAV (and hopefully the price) accounted for all the coupons the fund had gotten but not distributed.
That's not how it works for daily accrual funds like VBMFX Vanguard Total Bond: "The Fund’s income dividends are declared daily and distributed monthly." For daily accrual funds, you are due the interest accumulate during the days (partial month) you held the fund up to when you sold it. For monthly funds, the holder of the fund on the dividend record date gets the dividend (like equity funds).
viewtopic.php?t=170982

I looked over the BMOAX prospectus and it doesn't appear to be a daily accrual fund, but I did not find an explicit statement one way or the other.
Per BlackRock and my 401k provider, BMOAX is a daily accrual fund but, unlike Vanguard's bond funds, pays dividends monthly out of the underlying fund. That is, the daily accrual is reflected in the NAV of the fund rather than have these dividends be in a separate bucket. So, when my fund was sold, the prorated dividend was paid out in the form of a slightly higher NAV. Does this sound correct? It seems like an outlier compared to any other bond fund.
If you can find out what NAV was used to calculate the sale price of the fund shares when you rolled them out, you might compare that NAV with the "official" NAV at closing on that same date to see if in fact the dividend was baked into the sale price.

ETA: You might also check the activity of this fund in your 401k to see if perhaps you received a partial dividend before roll-out. That happened to me at Fidelity when I rolled out my 401k to my IRA. My bond fund's end-of-month monthly dividend immediately after roll-out was about half what had normally been, so I asked them about it, turned out they had paid a partial prorated dividend into the bond fund immediately prior to rolling it out. Taking that into account, the math came out pretty close to right.
Last edited by oldcomputerguy on Thu Apr 20, 2017 2:22 pm, edited 1 time in total.
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FactualFran
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Re: Bond fund dividend accrual-daily vs monthly

Post by FactualFran » Thu Apr 20, 2017 2:18 pm

duckcalldan wrote:Per BlackRock and my 401k provider, BMOAX is a daily accrual fund but, unlike Vanguard's bond funds, pays dividends monthly out of the underlying fund. That is, the daily accrual is reflected in the NAV of the fund rather than have these dividends be in a separate bucket. So, when my fund was sold, the prorated dividend was paid out in the form of a slightly higher NAV. Does this sound correct? It seems like an outlier compared to any other bond fund.
Yes, that sounds correct. Not all bond funds declare dividends daily, with the declared dividends not being part of the net assets of the fund. For example, the Vanguard Inflation-Protected Securities fund does not declare dividends daily.

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