Quick question on where VBTLX monthly dividend comes from

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Jesteroftheswamp
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Quick question on where VBTLX monthly dividend comes from

Post by Jesteroftheswamp »

Does anyone know where Vanguard bond funds or ETFs interest rate/dividend payments come from? Do they change monthly? I’ve noticed I’m getting a monthly dividend paid out on my Vanguard Bond etf and am wondering if it’s a consistent percentage like a “coupon” on a regular bond may be, or does it fluctuate?

Thank you
Rocky Mtn Man
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Re: Quick question on where VBTLX monthly dividend comes from

Post by Rocky Mtn Man »

https://investor.vanguard.com/investmen ... tributions

The dividends are not fixed, and are about 2.6 cents a month, plus or minus. I'm not sure how the exact distribution is calculated by the fund, that may be proprietary information.
livesoft
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Re: Quick question on where VBTLX monthly dividend comes from

Post by livesoft »

Did you read the Prospectus of what you buoght? Is your answer in there?
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Geologist
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Re: Quick question on where VBTLX monthly dividend comes from

Post by Geologist »

If you want to learn more about what your fund does, I recommend you look at the annual and semi-annual reports.

The annual report for Vanguard Total Bond Index Fund says the following: “Interest income includes income distributions received from Vanguard Market Liquidity Fund and is accrued daily. Premiums and discounts on debt securities are amortized and accreted, respectively, to interest income over the lives of the respective securities, except for premiums on certain callable debt securities that are amortized to the earliest call date.”

So interest on the debt securities accrues daily and is credited as income daily. (This is exactly how accrued interest is shown if you own debt securities directly.) This does not mean coupon payments because funds use accrual accounting.

Consequently, the monthly dividends are not fixed.

Earlier it then says “Distributions from net investment income are declared daily by all share classes except ETF Shares, and paid on the first business day of the following month.”
loukycpa
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Re: Quick question on where VBTLX monthly dividend comes from

Post by loukycpa »

The fund owns various bonds and receives the interest payments on those bonds. The IRS expects someone to pay income tax on that interest income. Therefore the fund has to pass out that interest income to owners of the fund or etf as a distribution. (if you are holding in a taxable account you will pay tax now in year you receive, if tax deferred or tax-free Roth that would be a different case)

So what you are seeing in your distribution is your share of the interest income received by the fund.

It will fluctuate as the interest income received by the fund on the holdings of the fund fluctuates. To the extent the bonds held by the fund have fixed coupon rates, it is fixed in that sense but only in that sense. At any point in time bonds held by the fund are maturing and the proceeds are being reinvested at new market rates. Occasionally some bonds held by the fund are sold and reinvested in other bonds to help the fund replicate the target index of the fund. So the reality is a little muddy to answer your question.
Last edited by loukycpa on Tue Apr 02, 2024 4:21 pm, edited 1 time in total.
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alex_686
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Re: Quick question on where VBTLX monthly dividend comes from

Post by alex_686 »

Jesteroftheswamp wrote: Tue Apr 02, 2024 12:42 am Does anyone know where Vanguard bond funds or ETFs interest rate/dividend payments come from?
Strickly speaking, nowhere.

All funds must "pay out" all income earned each year so a 1099-DIV can be sent out. Some funds pay daily, others monthly, some yearly. By "pay out" I mean do some journal entries. There is no cash flows. There is no economic impact. When this was my job all we did was literally do some journal entries.

The sole purpose of dividends is for income recognition for tax purposes. Really, don't overthink it.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
billaster
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Re: Quick question on where VBTLX monthly dividend comes from

Post by billaster »

alex_686 wrote: Tue Apr 02, 2024 4:20 pm
Jesteroftheswamp wrote: Tue Apr 02, 2024 12:42 am Does anyone know where Vanguard bond funds or ETFs interest rate/dividend payments come from?
Strickly speaking, nowhere.

All funds must "pay out" all income earned each year so a 1099-DIV can be sent out. Some funds pay daily, others monthly, some yearly. By "pay out" I mean do some journal entries. There is no cash flows. There is no economic impact. When this was my job all we did was literally do some journal entries.

The sole purpose of dividends is for income recognition for tax purposes. Really, don't overthink it.
That's funny. There certainly is cash flowing out of my bond fund. And there is cash flowing into my settlement fund. Maybe you meant the two net out to zero. But the flows would also net out to zero if I sold shares of a fund. So do you also claim that selling shares have no flows and has no economic impact?
alex_686
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Re: Quick question on where VBTLX monthly dividend comes from

Post by alex_686 »

billaster wrote: Tue Apr 02, 2024 5:05 pm That's funny. There certainly is cash flowing out of my bond fund. And there is cash flowing into my settlement fund. Maybe you meant the two net out to zero. But the flows would also net out to zero if I sold shares of a fund. So do you also claim that selling shares have no flows and has no economic impact?
But the cash isn't coming from the dividend.

People redeem mutual funds all of the time. Sometimes it is a manual trade. Sometimes it is a automated trade. Maybe the automated trade is tied to the end of the month, maybe it is tied to the distribution. Whatever. All of these redemptions are treated exactly the same. The redemptions tied to dividends are not special in any way.

As I said, dividends are all about income recognition. Here we have 2 separate processes. Distributions and redemptions. If you mush these 2 unrelated things together you are going to come to some wrong conclusions.

To extend, I can tie automatic redamations to almost anything. The yield of the fund. Inches of rain received in NYC. Whatever.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
billaster
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Re: Quick question on where VBTLX monthly dividend comes from

Post by billaster »

alex_686 wrote: Tue Apr 02, 2024 5:23 pm
billaster wrote: Tue Apr 02, 2024 5:05 pm That's funny. There certainly is cash flowing out of my bond fund. And there is cash flowing into my settlement fund. Maybe you meant the two net out to zero. But the flows would also net out to zero if I sold shares of a fund. So do you also claim that selling shares have no flows and has no economic impact?
But the cash isn't coming from the dividend.
Of course it's coming from the dividend. I can see it right on my statement. The dividend is paid and the cash is transferred to my settlement account -- real cash money I can spend.
alex_686 wrote: Tue Apr 02, 2024 5:23 pm People redeem mutual funds all of the time. Sometimes it is a manual trade. Sometimes it is a automated trade. Maybe the automated trade is tied to the end of the month, maybe it is tied to the distribution. Whatever. All of these redemptions are treated exactly the same. The redemptions tied to dividends are not special in any way.
So redemptions tied to dividends are not special in any way. Only you say they are special. You say they have no cash flow, which is absurd.
alex_686 wrote: Tue Apr 02, 2024 5:23 pm As I said, dividends are all about income recognition. Here we have 2 separate processes. Distributions and redemptions. If you mush these 2 unrelated things together you are going to come to some wrong conclusions.
Both mutual fund dividends and mutual fund redemptions are about income recognition. Dividends are mandated by law and redemptions are voluntary, but they both have a result of realizing income and may be taxable. The both result in a cash flow.
alex_686 wrote: Tue Apr 02, 2024 5:23 pm To extend, I can tie automatic redamations to almost anything. The yield of the fund. Inches of rain received in NYC. Whatever.
No you can't. Mutual fund dividends are defined explicitly and mandated by federal law. You can't make up your own laws. They aren't arbitrary. They are for the purpose of taxation of income.
loukycpa
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Re: Quick question on where VBTLX monthly dividend comes from

Post by loukycpa »

alex_686 wrote: Tue Apr 02, 2024 5:23 pm
billaster wrote: Tue Apr 02, 2024 5:05 pm That's funny. There certainly is cash flowing out of my bond fund. And there is cash flowing into my settlement fund. Maybe you meant the two net out to zero. But the flows would also net out to zero if I sold shares of a fund. So do you also claim that selling shares have no flows and has no economic impact?
But the cash isn't coming from the dividend.

People redeem mutual funds all of the time. Sometimes it is a manual trade. Sometimes it is a automated trade. Maybe the automated trade is tied to the end of the month, maybe it is tied to the distribution. Whatever. All of these redemptions are treated exactly the same. The redemptions tied to dividends are not special in any way.

As I said, dividends are all about income recognition. Here we have 2 separate processes. Distributions and redemptions. If you mush these 2 unrelated things together you are going to come to some wrong conclusions.

To extend, I can tie automatic redamations to almost anything. The yield of the fund. Inches of rain received in NYC. Whatever.
Part 1 - The real economic impact (increase to wealth) happened as interest was accrued and ultimately received by the fund, increasing the value of the fund and your share of it.

Part 2 - Agree that the subsequent accounting and distribution of that income is essentially just book entries and forced selling. It is required for tax reasons.

Billaster is right I think that part 1 is very relevant in a bond fund. It is the reason to own it in the first place. And it causes the need for part 2.
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grabiner
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Re: Quick question on where VBTLX monthly dividend comes from

Post by grabiner »

loukycpa wrote: Tue Apr 02, 2024 4:15 pm It will fluctuate as the interest income received by the fund on the holdings of the fund fluctuates. To the extent the bonds held by the fund have fixed coupon rates, it is fixed in that sense but only in that sense. At any point in time bonds held by the fund are maturing and the proceeds are being reinvested at new market rates. Occasionally some bonds held by the fund are sold and reinvested in other bonds to help the fund replicate the target index of the fund. So the reality is a little muddy to answer your question.
Meanwhile, the bonds in the fund may change in price; this affects your returns but not your dividends. In particular, if a bond is currently trading for less than its par value, the bondholder will get the par value when the bond matures, so their total return will be more than the coupons. A fund holding such a bond might report a 4% SEC yield but only pay out 3% individends; if you invest $1000 in this fund for a year and interest rates don't change, you will have $30 in cash dividends and your investment will be worth $1010 next year.
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