Question about dividends paid out by mutual funds

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jcavana1
Posts: 48
Joined: Mon Aug 22, 2016 5:21 pm

Question about dividends paid out by mutual funds

Post by jcavana1 » Tue Apr 25, 2017 10:58 am

When owning a single stock the dividend eligible and payout dates are clearly defined and the stock is marked down on the payout date (I believe).

How does this process work with funds that payout dividends annually? What is to stop someone from purchasing the fund immediately before the dividend is to be paid out and then sell the stock immediately after?

Thanks

John Z
Posts: 320
Joined: Sun Nov 14, 2010 5:42 pm

Re: Question about dividends paid out by mutual funds

Post by John Z » Tue Apr 25, 2017 11:01 am

Because the price will drop to equal the dividend payout (not counting any daily price movement), and, now you have to declare the dividend in your income tax for the year. Best to buy after dividend payout.

barnaclebob
Posts: 3033
Joined: Thu Aug 09, 2012 10:54 am

Re: Question about dividends paid out by mutual funds

Post by barnaclebob » Tue Apr 25, 2017 11:01 am

Buying right before a dividend and selling after would just net you a larger tax bill in most cases. Dividends aren't free money, it comes from the share price of the stock or mutual fund. If a $100/share fund or stock pays out a $.50 dividend the share price after the dividend will be $99.50 and you will now have 1.005 (or maybe 1.00502 shares depending on how the math is done) shares of that stock or fund for each share you owned before the dividend. If the dividend is reinvested your average cost basis will now be slightly different because the dividend is reinvested at the new.

Many dividend investors i have talked with actually refuse to believe this because the dividend sometimes gets "lost" in normal market movements on the day they are paid out.
Last edited by barnaclebob on Tue Apr 25, 2017 11:08 am, edited 2 times in total.

livesoft
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Joined: Thu Mar 01, 2007 8:00 pm

Re: Question about dividends paid out by mutual funds

Post by livesoft » Tue Apr 25, 2017 11:05 am

For most mutual funds the dividends act the same way as for stocks: The NAV will drop when the fund goes "ex-dividend."

But for a handful of bond mutual funds that pay a monthly dividend, the NAV does not drop because the dividend for the month is held separately and paid out pro-rated for intra-monthly transactions. Not all bond funds that pay a monthly dividend act this way.

There is no way to game a dividend away from somebody who has earned it. So one can purchase the fund immediately before the dividend is to be paid out and then sell the fund immediately after if they want to, but it would not gain them anything.

And if you like to scheme, try this: Look at a Vanguard fund that has both mutual fund and ETF share classes. These two classes of shares pay their dividends on different days. Can you buy the fund, get the dividend, sell the fund, then buy the ETF and get its dividend, so that you double up on dividends? :twisted:
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