How are stock dividends and bond coupons distributed in funds investment?

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butforwales
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How are stock dividends and bond coupons distributed in funds investment?

Post by butforwales » Wed Oct 10, 2018 1:17 pm

Hello all,

I wonder when I hold a total market stock fund how I receive the dividend, and similarly how I receive coupon payment for a total bond fund. In the context of 401k, do I received dividend and coupon in cash and reinvest at the time of re-balance? Or these dividend and coupon payments become part of the per share price of the mutual funds?
Thanks!

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dwickenh
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Re: How are stock dividends and bond coupons distributed in funds investment?

Post by dwickenh » Wed Oct 10, 2018 1:46 pm

The dividend and interest coupon is reinvested in additional shares of the same fund in most cases. On the date that dividends are paid and reinvested, you may not see a different dollar amount, only a different share count. The funds price drops to reflect the dividend paid, and the additional share bring the total back to what it was before the dividend payment. Clear as mud, right?
The market is the most efficient mechanism anywhere in the world for transferring wealth from impatient people to patient people.” | — Warren Buffett

delamer
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Re: How are stock dividends and bond coupons distributed in funds investment?

Post by delamer » Wed Oct 10, 2018 1:56 pm

dwickenh wrote:
Wed Oct 10, 2018 1:46 pm
The dividend and interest coupon is reinvested in additional shares of the same fund in most cases. On the date that dividends are paid and reinvested, you may not see a different dollar amount, only a different share count. The funds price drops to reflect the dividend paid, and the additional share bring the total back to what it was before the dividend payment. Clear as mud, right?
My impression is that this is true in most plans, as noted above.

However, in some plans, like the federal TSP (the equivalent of a 401(k) for federal civilian and military), new shares are not purchased with dividends/interest but the share price increases. From the TSP website:

“At the end of each business day, after the stock and bond markets have closed, the total value of the funds' holdings (net of accrued administrative expenses) is divided by the total number of shares outstanding to determine the share price for that day.”

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celia
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Re: How are stock dividends and bond coupons distributed in funds investment?

Post by celia » Wed Oct 10, 2018 2:19 pm

Depending on the fund, you will receive dividends/interest/capital gains monthly, quarterly, or yearly. It is your choice to have the payments automatically re-invested in more shares or to put them in the settlement fund as cash.


If you want to set your choice the same for all funds in an account, at Vanguard go to:
My Accounts > Account Maintenance
Under "Trading services and agreements", click on Account level dividend and capital gains elections.
Then choose the account, and next to "Account dividend and capital gains elections" (again), you can set or change your choice to either "Reinvest" or "Transfer to settlement fund".

If you want to set your choice differently for each fund in an account, at Vanguard go to:
My Accounts > Account Maintenance
Under "Account Profile", click on Account level dividend and capital gains elections.
You should then see all your accounts with all their holdings. You will see the current settings for Dividends and Capital Gains. To change any of them, click on Change elections under the account you want to modify.


In IRAs, I have them re-invested since there are no tax consequences (all money is taxed when it goes into a Roth or when it comes out in a traditional IRA). But for taxable accounts, when you re-invest, you would get a small purchase for each re-investment which can complicate your cost basis when you sell. Therefore, I have all funds in a taxable account put the dividends in the settlement account. When the balance is big enough (about once a year), I buy more shares of whatever fund is underweighted at the time.

FactualFran
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Re: How are stock dividends and bond coupons distributed in funds investment?

Post by FactualFran » Wed Oct 10, 2018 3:39 pm

butforwales wrote:
Wed Oct 10, 2018 1:17 pm
I wonder when I hold a total market stock fund how I receive the dividend, and similarly how I receive coupon payment for a total bond fund. In the context of 401k, do I received dividend and coupon in cash and reinvest at the time of re-balance? Or these dividend and coupon payments become part of the per share price of the mutual funds?
It depends on the type of investment product that is available in the 401(k).

If the 401(k) offers shares of a Mutual fund, such as the Vanguard Total Stock Market fund, then the 401(k) account get credited with the fund distribution amounts. I suspect that with 401(k) the default, and maybe only, option is to automatically reinvest the distributions.

If the 401(k) offers shares of Commingled Funds, the fund does not make distributions, and the effect of the fund receiving interest and dividend payments from its holding is reflected in the per share price of the fund.
Last edited by FactualFran on Wed Oct 10, 2018 6:02 pm, edited 1 time in total.

22twain
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Re: How are stock dividends and bond coupons distributed in funds investment?

Post by 22twain » Wed Oct 10, 2018 5:54 pm

butforwales wrote:
Wed Oct 10, 2018 1:17 pm
In the context of 401k
As you can see, the general answer is "it depends on how your plan is set up." So "in the context of your 401K", the answer is whatever your plan's documentation says.
My investing princiPLEs do not include absolutely preserving princiPAL.

butforwales
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Re: How are stock dividends and bond coupons distributed in funds investment?

Post by butforwales » Fri Oct 12, 2018 10:15 am

Thank you for all of your suggestion! I have figured out by examining the account history: all dividends and interests payments were immediately reinvested.

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