Buying right before a dividend and capital gain distributions

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fctu
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Buying right before a dividend and capital gain distributions

Post by fctu » Mon Oct 08, 2018 7:39 pm

Sometimes I buy some mutual fund and then I see that it has distributed its annual or quarterly dividends the next day. It probably would have been better had I bought it the next day for tax purposes.

Is there a good strategy for this? How close to the quarterly or annual distribution is too close so you should wait to invest?

Is this significant enough to worry about?

livesoft
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Re: Buying right before a dividend and capital gain distributions

Post by livesoft » Mon Oct 08, 2018 7:47 pm

If the daily action of the fund price suggests that it might move by two or more times the dividend amount in the time between purchase and dividend, then I would just buy it. For many index funds that pay a quarterly dividend, that might mean buy except for within a week of the dividend.
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Artsdoctor
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Re: Buying right before a dividend and capital gain distributions

Post by Artsdoctor » Tue Oct 09, 2018 6:24 pm

fctu wrote:
Mon Oct 08, 2018 7:39 pm
Sometimes I buy some mutual fund and then I see that it has distributed its annual or quarterly dividends the next day. It probably would have been better had I bought it the next day for tax purposes.

Is there a good strategy for this? How close to the quarterly or annual distribution is too close so you should wait to invest?

Is this significant enough to worry about?
I'm presuming you're talking about a taxable account. This is all a moot point if investing in a tax-advantaged account.

This is going to be a matter of degree. If you're investing $1,000 on the day before a quarterly distribution, it's not worth thinking about. If you're investing $50,000 on the day before an annual distribution, then you've wasted money for no reason.

Your investment company will tell you when the distributions are, although some do it better than others. Therefore, you can time your investments accordingly. Quarterly distributions smooth things out so, depending the amount you're going to invest, you may not be interested in keeping track of these dates although it's always good practice to be aware. If your fund has only an annual distribution, then it becomes a matter of degree; however, I'd really try to stay on top of those annual distributions because there can sometimes be surprises and you've simply wasted your money for no gain.

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grabiner
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Re: Buying right before a dividend and capital gain distributions

Post by grabiner » Tue Oct 09, 2018 8:20 pm

For a typical distribution, there is little benefit for waiting, and it probably isn't worth waiting too long. Consider a fund like Vanguard Total Stock Market, which distributes about a 2% qualified dividend annually, or 0.5% per quarter. In a typical tax bracket, the tax cost is 0.08%, which is $8 on a $10,000 investment.

If you wait a month to invest, the 0.08% cost is equivalent to less than 1% annualized, and the cost of holding cash rather than bonds is more than that.
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Ron Scott
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Re: Buying right before a dividend and capital gain distributions

Post by Ron Scott » Wed Oct 10, 2018 12:39 pm

grabiner wrote:
Tue Oct 09, 2018 8:20 pm
For a typical distribution, there is little benefit for waiting, and it probably isn't worth waiting too long. Consider a fund like Vanguard Total Stock Market, which distributes about a 2% qualified dividend annually, or 0.5% per quarter. In a typical tax bracket, the tax cost is 0.08%, which is $8 on a $10,000 investment.

If you wait a month to invest, the 0.08% cost is equivalent to less than 1% annualized, and the cost of holding cash rather than bonds is more than that.
I never focused on this and I know I am missing a major component of the strategy. Why wouldn’t it be better to simply buy the dividend and pay taxes on part of it? Wouldn’t you end up with more post-tax money from the dividend than you would have had you waited to buy until after its distribution?
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retiringwhen
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Re: Buying right before a dividend and capital gain distributions

Post by retiringwhen » Wed Oct 10, 2018 1:27 pm

livesoft wrote:
Mon Oct 08, 2018 7:47 pm
If the daily action of the fund price suggests that it might move by two or more times the dividend amount in the time between purchase and dividend, then I would just buy it. For many index funds that pay a quarterly dividend, that might mean buy except for within a week of the dividend.
I like your heuristic, I always seem to have no problem delaying 1 week before a dividend payout, but 1-2 weeks sometimes makes me wonder if I should wait. more than 2 weeks, I just buy it. Maybe i'll make 1 week my formal policy to stress less.

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grabiner
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Re: Buying right before a dividend and capital gain distributions

Post by grabiner » Wed Oct 10, 2018 8:38 pm

Ron Scott wrote:
Wed Oct 10, 2018 12:39 pm
grabiner wrote:
Tue Oct 09, 2018 8:20 pm
For a typical distribution, there is little benefit for waiting, and it probably isn't worth waiting too long. Consider a fund like Vanguard Total Stock Market, which distributes about a 2% qualified dividend annually, or 0.5% per quarter. In a typical tax bracket, the tax cost is 0.08%, which is $8 on a $10,000 investment.

If you wait a month to invest, the 0.08% cost is equivalent to less than 1% annualized, and the cost of holding cash rather than bonds is more than that.
I never focused on this and I know I am missing a major component of the strategy. Why wouldn’t it be better to simply buy the dividend and pay taxes on part of it? Wouldn’t you end up with more post-tax money from the dividend than you would have had you waited to buy until after its distribution?
No, because the value of the fund decreases by the amount of the dividend (plus or minus any market movements).

For an open-end fund, this happens by definition, because the fund is valued at NAV, If a fund has one million shares and $100M in assets, the NAV is $100 per share. Now, if it pays out a $1 dividend per share, it now has only $99M in assets and thus the share price must drop from $100 to $99.

For a stock, this is an expectation. If a stock will pay out a $1 dividend on Wednesday, and you expect it to be worth $99 on Thursday, you should be willing to pay $100 on Wednesday since you will get a $1 dividend and a share of stock worth $99. Thus, again, if investors' expectations of the future stock value don't change, the price will decline by $1 on the ex-dividend day.
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