How does time in mutual fund (VTSAX) affect quarterly dividend

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anon3838
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How does time in mutual fund (VTSAX) affect quarterly dividend

Post by anon3838 » Thu Feb 13, 2020 10:26 pm

Let's say I contribute an additional $100K to VTSAX halfway through the quarter. How is the dividend calculated on that lot/those shares?

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Re: How does time in mutual fund (VTSAX) affect quarterly dividend

Post by ruud » Thu Feb 13, 2020 10:32 pm

Time you own the fund does not matter. The dividend is a specified amount per share owned on the record day.
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Re: How does time in mutual fund (VTSAX) affect quarterly dividend

Post by anon3838 » Thu Feb 13, 2020 11:01 pm

ruud wrote:
Thu Feb 13, 2020 10:32 pm
Time you own the fund does not matter. The dividend is a specified amount per share owned on the record day.
thank you!

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Re: How does time in mutual fund (VTSAX) affect quarterly dividend

Post by grabiner » Fri Feb 14, 2020 9:16 pm

ruud wrote:
Thu Feb 13, 2020 10:32 pm
Time you own the fund does not matter. The dividend is a specified amount per share owned on the record day.
And if the market doesn't move, the fund price drops by the amount of the dividend, so you don't actually gain anything by holding the fund on the record date rather than on any other date.
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Re: How does time in mutual fund (VTSAX) affect quarterly dividend

Post by rossington » Sat Feb 15, 2020 3:45 am

grabiner wrote:
Fri Feb 14, 2020 9:16 pm
ruud wrote:
Thu Feb 13, 2020 10:32 pm
Time you own the fund does not matter. The dividend is a specified amount per share owned on the record day.
And if the market doesn't move, the fund price drops by the amount of the dividend, so you don't actually gain anything by holding the fund on the record date rather than on any other date.
But if reinvesting the dividend you GAIN more shares of the fund when the VTSAX dividend is paid. This is beneficial in a rising stock market environment when one is selling shares.
"Success is going from failure to failure without loss of enthusiasm." Winston Churchill.

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Re: How does time in mutual fund (VTSAX) affect quarterly dividend

Post by UpperNwGuy » Sat Feb 15, 2020 6:33 am

rossington wrote:
Sat Feb 15, 2020 3:45 am
grabiner wrote:
Fri Feb 14, 2020 9:16 pm
ruud wrote:
Thu Feb 13, 2020 10:32 pm
Time you own the fund does not matter. The dividend is a specified amount per share owned on the record day.
And if the market doesn't move, the fund price drops by the amount of the dividend, so you don't actually gain anything by holding the fund on the record date rather than on any other date.
But if reinvesting the dividend you GAIN more shares of the fund when the VTSAX dividend is paid. This is beneficial in a rising stock market environment when one is selling shares.
Not sure I follow your argument. More shares at a lower price is beneficial somehow?

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Re: How does time in mutual fund (VTSAX) affect quarterly dividend

Post by N.Y.Cab » Sat Feb 15, 2020 7:09 am

For money market or bond funds, there is accrued dividend that grows daily. At Vanguard it’s under Balances by date tab.

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Re: How does time in mutual fund (VTSAX) affect quarterly dividend

Post by acegolfer » Sat Feb 15, 2020 7:51 am

N.Y.Cab wrote:
Sat Feb 15, 2020 7:09 am
For money market or bond funds, there is accrued dividend that grows daily. At Vanguard it’s under Balances by date tab.
That's because for bonds, the "quoted" price doesn't drop after the coupon is paid. What one pays at purchase (=invoice price) = quoted price + accrued interest. Or, quoted price = PV - accrued interest.

a big difference in what quoted prices represent between stocks and bonds.

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Re: How does time in mutual fund (VTSAX) affect quarterly dividend

Post by grabiner » Sun Feb 16, 2020 11:15 am

rossington wrote:
Sat Feb 15, 2020 3:45 am
grabiner wrote:
Fri Feb 14, 2020 9:16 pm
ruud wrote:
Thu Feb 13, 2020 10:32 pm
Time you own the fund does not matter. The dividend is a specified amount per share owned on the record day.
And if the market doesn't move, the fund price drops by the amount of the dividend, so you don't actually gain anything by holding the fund on the record date rather than on any other date.
But if reinvesting the dividend you GAIN more shares of the fund when the VTSAX dividend is paid. This is beneficial in a rising stock market environment when one is selling shares.
It doesn't matter whether you gain shares or your existing shares gain value.

Suppose that you have 100 shares of a fund worth $100 per share. If the market rises by 1% on a non-dividend day, you have 100 shares worth $101 per share. If the market rises by 1% on the day that a dividend of $1 per share is paid out, and you reinvest that dividend, you have 101 shares worth $100 per share.

The only reason this matters is the tax consequence, for a taxable investment. If you reinvested the $100 dividend in a taxable account, you still owe tax on it, likely $15. (Therefore, it is recommended not to buy a mutual fund right before it makes a large distribution. For something like Vanguard Total Stock Market with dividends of 0.5% per quarter, almost all qualified, the tax benefit from waiting more than a week is less than the loss of staying out of the market.)
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Re: How does time in mutual fund (VTSAX) affect quarterly dividend

Post by jhfenton » Sun Feb 16, 2020 7:25 pm

N.Y.Cab wrote:
Sat Feb 15, 2020 7:09 am
For money market or bond funds, there is accrued dividend that grows daily. At Vanguard it’s under Balances by date tab.
Money market and some bond funds. I believe Vanguard Total Bond Index Admiral Shares declares and accrues dividends daily, and many of the older active Vanguard bond mutual funds do as well--including Vanguard Ohio Long-Term Tax Exempt that I own. But most of the newer Vanguard bond index mutual funds declare dividends monthly to match the ETF share class. (That mismatch is actually why the Total Bond Index Admiral Shares are not convertible to the ETF share class while the newer bond index mutual funds are convertible to the ETF share class.)

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Re: How does time in mutual fund (VTSAX) affect quarterly dividend

Post by rkhusky » Sun Feb 16, 2020 7:51 pm

jhfenton wrote:
Sun Feb 16, 2020 7:25 pm
N.Y.Cab wrote:
Sat Feb 15, 2020 7:09 am
For money market or bond funds, there is accrued dividend that grows daily. At Vanguard it’s under Balances by date tab.
Money market and some bond funds. I believe Vanguard Total Bond Index Admiral Shares declares and accrues dividends daily, and many of the older active Vanguard bond mutual funds do as well--including Vanguard Ohio Long-Term Tax Exempt that I own. But most of the newer Vanguard bond index mutual funds declare dividends monthly to match the ETF share class. (That mismatch is actually why the Total Bond Index Admiral Shares are not convertible to the ETF share class while the newer bond index mutual funds are convertible to the ETF share class.)
There are some special rules involved with bond funds that do not accrue dividends daily. Specifically, there is a 6-month holding period for claiming losses in tax exempt bond funds that do not accrue dividends daily.

viewtopic.php?f=1&t=241278
viewtopic.php?f=1&t=240490
https://www.bogleheads.org/wiki/Municipal_bonds

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Re: How does time in mutual fund (VTSAX) affect quarterly dividend

Post by jhfenton » Sun Feb 16, 2020 9:56 pm

rkhusky wrote:
Sun Feb 16, 2020 7:51 pm
There are some special rules involved with bond funds that do not accrue dividends daily. Specifically, there is a 6-month holding period for claiming losses in tax exempt bond funds that do not accrue dividends daily.

viewtopic.php?f=1&t=241278
viewtopic.php?f=1&t=240490
https://www.bogleheads.org/wiki/Municipal_bonds
I'm aware of the rules, and, as I said, VOHIX does declare dividends daily. I believe all of Vanguard's original active muni bond funds declare daily. (I don't hold any other bond funds in a taxable account.)

From the VOHIX prospectus:
Income dividends generally are declared daily and distributed monthly; capital gains distributions, if any, generally occur annually in December.
The newer Vanguard Municipal Bond Index Fund (VTEAX) declares monthly, so 6-month rule for capital losses would apply:
Income dividends generally are declared monthly and distributed monthly; capital gains distributions, if any, generally occur annually in December.
Vanguard's newer bond index funds were created with ETF share classes from the beginning, so they declare monthly for simplicity. Vanguard Total Bond Index Admiral is the oddball, with the ETF share class added later. So Total Bond kept its daily declaration of dividends.

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Re: How does time in mutual fund (VTSAX) affect quarterly dividend

Post by rossington » Mon Feb 17, 2020 1:45 am

grabiner wrote:
Sun Feb 16, 2020 11:15 am
rossington wrote:
Sat Feb 15, 2020 3:45 am
grabiner wrote:
Fri Feb 14, 2020 9:16 pm
ruud wrote:
Thu Feb 13, 2020 10:32 pm
Time you own the fund does not matter. The dividend is a specified amount per share owned on the record day.
And if the market doesn't move, the fund price drops by the amount of the dividend, so you don't actually gain anything by holding the fund on the record date rather than on any other date.
But if reinvesting the dividend you GAIN more shares of the fund when the VTSAX dividend is paid. This is beneficial in a rising stock market environment when one is selling shares.
It doesn't matter whether you gain shares or your existing shares gain value.

Suppose that you have 100 shares of a fund worth $100 per share. If the market rises by 1% on a non-dividend day, you have 100 shares worth $101 per share. If the market rises by 1% on the day that a dividend of $1 per share is paid out, and you reinvest that dividend, you have 101 shares worth $100 per share.

The only reason this matters is the tax consequence, for a taxable investment. If you reinvested the $100 dividend in a taxable account, you still owe tax on it, likely $15. (Therefore, it is recommended not to buy a mutual fund right before it makes a large distribution. For something like Vanguard Total Stock Market with dividends of 0.5% per quarter, almost all qualified, the tax benefit from waiting more than a week is less than the loss of staying out of the market.)
I agree completely, but the dividend payout date related price fluctuations are only temporary..... So my point (and I went off on a tangent from your original explanation) is that having the additional shares from dividend reinvestment is beneficial in a RISING stock market. When shares are appreciating in value if one needs to sell shares they will sell fewer shares thus holding more future shares. Even after tax considerations this is a positive effect on a portfolio.
"Success is going from failure to failure without loss of enthusiasm." Winston Churchill.

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Re: How does time in mutual fund (VTSAX) affect quarterly dividend

Post by JustinR » Mon Feb 17, 2020 3:55 am

rossington wrote:
Sat Feb 15, 2020 3:45 am
grabiner wrote:
Fri Feb 14, 2020 9:16 pm
ruud wrote:
Thu Feb 13, 2020 10:32 pm
Time you own the fund does not matter. The dividend is a specified amount per share owned on the record day.
And if the market doesn't move, the fund price drops by the amount of the dividend, so you don't actually gain anything by holding the fund on the record date rather than on any other date.
But if reinvesting the dividend you GAIN more shares of the fund when the VTSAX dividend is paid. This is beneficial in a rising stock market environment when one is selling shares.
rossington wrote:
Mon Feb 17, 2020 1:45 am
grabiner wrote:
Sun Feb 16, 2020 11:15 am
rossington wrote:
Sat Feb 15, 2020 3:45 am
grabiner wrote:
Fri Feb 14, 2020 9:16 pm
ruud wrote:
Thu Feb 13, 2020 10:32 pm
Time you own the fund does not matter. The dividend is a specified amount per share owned on the record day.
And if the market doesn't move, the fund price drops by the amount of the dividend, so you don't actually gain anything by holding the fund on the record date rather than on any other date.
But if reinvesting the dividend you GAIN more shares of the fund when the VTSAX dividend is paid. This is beneficial in a rising stock market environment when one is selling shares.
It doesn't matter whether you gain shares or your existing shares gain value.

Suppose that you have 100 shares of a fund worth $100 per share. If the market rises by 1% on a non-dividend day, you have 100 shares worth $101 per share. If the market rises by 1% on the day that a dividend of $1 per share is paid out, and you reinvest that dividend, you have 101 shares worth $100 per share.

The only reason this matters is the tax consequence, for a taxable investment. If you reinvested the $100 dividend in a taxable account, you still owe tax on it, likely $15. (Therefore, it is recommended not to buy a mutual fund right before it makes a large distribution. For something like Vanguard Total Stock Market with dividends of 0.5% per quarter, almost all qualified, the tax benefit from waiting more than a week is less than the loss of staying out of the market.)
I agree completely, but the dividend payout date related price fluctuations are only temporary..... So my point (and I went off on a tangent from your original explanation) is that having the additional shares from dividend reinvestment is beneficial in a RISING stock market. When shares are appreciating in value if one needs to sell shares they will sell fewer shares thus holding more future shares. Even after tax considerations this is a positive effect on a portfolio.
Completely incorrect.

[Receiving a dividend, reinvesting it, and then the stock value goes up] is mathematically equivalent to [no dividend distributed and the stock value goes up].

Except with the dividend you're taxed, so you actually lose money when you receive a dividend.

Having "more shares" of something is a completely meaningless statement. 5 shares of a $1 stock is the same thing as 1 share of a $5 stock.

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Re: How does time in mutual fund (VTSAX) affect quarterly dividend

Post by grabiner » Mon Feb 17, 2020 10:39 am

rossington wrote:
Mon Feb 17, 2020 1:45 am
grabiner wrote:
Sun Feb 16, 2020 11:15 am
Suppose that you have 100 shares of a fund worth $100 per share. If the market rises by 1% on a non-dividend day, you have 100 shares worth $101 per share. If the market rises by 1% on the day that a dividend of $1 per share is paid out, and you reinvest that dividend, you have 101 shares worth $100 per share.

The only reason this matters is the tax consequence, for a taxable investment. If you reinvested the $100 dividend in a taxable account, you still owe tax on it, likely $15. (Therefore, it is recommended not to buy a mutual fund right before it makes a large distribution. For something like Vanguard Total Stock Market with dividends of 0.5% per quarter, almost all qualified, the tax benefit from waiting more than a week is less than the loss of staying out of the market.)
I agree completely, but the dividend payout date related price fluctuations are only temporary..... So my point (and I went off on a tangent from your original explanation) is that having the additional shares from dividend reinvestment is beneficial in a RISING stock market. When shares are appreciating in value if one needs to sell shares they will sell fewer shares thus holding more future shares. Even after tax considerations this is a positive effect on a portfolio.
When the fund price drops, you have more shares in the fund, but each share represents fewer shares of stock, so you get less of a gain per share from rising stock prices. It's still break-even.

Suppose, in the above example, that the market rises by 10% after you buy the shares. If no dividend was paid, you have 100 shares which were worth $101 per share, and after the market rises, you have 100 shares worth $111.10 per share. If a dividend was paid and reinvested, you have 101 shares which were worth $100 per share, and after the market rises, you have 101 shares worth $110 per share. Either way, you have $11,110.
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Re: How does time in mutual fund (VTSAX) affect quarterly dividend

Post by alex_686 » Mon Feb 17, 2020 10:49 am

rossington wrote:
Mon Feb 17, 2020 1:45 am
I agree completely, but the dividend payout date related price fluctuations are only temporary..... So my point (and I went off on a tangent from your original explanation) is that having the additional shares from dividend reinvestment is beneficial in a RISING stock market. When shares are appreciating in value if one needs to sell shares they will sell fewer shares thus holding more future shares. Even after tax considerations this is a positive effect on a portfolio.
Former mutual fund accountant who did performance reporting. This is mostly false. What you care about is total returns. The number of shares really don’t matter. There is a fair amount of marketing regulation around thus issue because it is inherently misleading.

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Re: How does time in mutual fund (VTSAX) affect quarterly dividend

Post by rossington » Mon Feb 17, 2020 1:20 pm

alex_686 wrote:
Mon Feb 17, 2020 10:49 am
rossington wrote:
Mon Feb 17, 2020 1:45 am
I agree completely, but the dividend payout date related price fluctuations are only temporary..... So my point (and I went off on a tangent from your original explanation) is that having the additional shares from dividend reinvestment is beneficial in a RISING stock market. When shares are appreciating in value if one needs to sell shares they will sell fewer shares thus holding more future shares. Even after tax considerations this is a positive effect on a portfolio.
Former mutual fund accountant who did performance reporting. This is mostly false. What you care about is total returns. The number of shares really don’t matter. There is a fair amount of marketing regulation around thus issue because it is inherently misleading.
Ok, but since fund ownership is denominated in shares that have a NAV at the end of the day... the only way to increase total return of a fund is 1) to have a static number of shares that you own hopefully appreciate in value over time, or 2) add to the position by owning more shares with the same expectation for price appreciation. Otherwise what is the point of reinvesting dividends or adding further contributions to the fund over time?
Am I missing something?
"Success is going from failure to failure without loss of enthusiasm." Winston Churchill.

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Re: How does time in mutual fund (VTSAX) affect quarterly dividend

Post by alex_686 » Mon Feb 17, 2020 1:53 pm

rossington wrote:
Mon Feb 17, 2020 1:20 pm
Ok, but since fund ownership is denominated in shares that have a NAV at the end of the day... the only way to increase total return of a fund is 1) to have a static number of shares that you own hopefully appreciate in value over time, or 2) add to the position by owning more shares with the same expectation for price appreciation. Otherwise what is the point of reinvesting dividends or adding further contributions to the fund over time?
Am I missing something?
If point 1 is “hopefully appreciate” in value then point 2 must also be “hopefully remain stable in value”.

I think you are missing 2 things.

What we care about is the value of the underlying assets. If a fund is up by 10% does it matter if the share price increases by 10% or if your share count goes up 10%? No, it does not. Well, what about if it goes up by another 10%? Still no. You just manipulating the # of shares/ share price - not the underlying economic value.

Second, it might help if you realize that the only reason why mutual funds pays dividends is to generate reportable transactions to the IRS to calculate your taxes. There is the fund type CIT that you can find retirement plans which don’t pay out dividends. Their total returns track the dividend type of funds like it was on rails.

First,

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Re: How does time in mutual fund (VTSAX) affect quarterly dividend

Post by grabiner » Mon Feb 17, 2020 2:17 pm

alex_686 wrote:
Mon Feb 17, 2020 1:53 pm
Second, it might help if you realize that the only reason why mutual funds pays dividends is to generate reportable transactions to the IRS to calculate your taxes. There is the fund type CIT that you can find retirement plans which don’t pay out dividends. Their total returns track the dividend type of funds like it was on rails.
You can check this by going to https://www.tsp.gov to track the US Government's TSP. The TSP C fund is an S&P 500 index which does not pay out dividends. Its share price grows at the same rate as the total return (including reinvested dividends) of Vanguard's VFIAX (500 Index Admiral).
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Re: How does time in mutual fund (VTSAX) affect quarterly dividend

Post by TropikThunder » Mon Feb 17, 2020 7:03 pm

grabiner wrote:
Mon Feb 17, 2020 2:17 pm
alex_686 wrote:
Mon Feb 17, 2020 1:53 pm
Second, it might help if you realize that the only reason why mutual funds pays dividends is to generate reportable transactions to the IRS to calculate your taxes. There is the fund type CIT that you can find retirement plans which don’t pay out dividends. Their total returns track the dividend type of funds like it was on rails.
You can check this by going to https://www.tsp.gov to track the US Government's TSP. The TSP C fund is an S&P 500 index which does not pay out dividends. Its share price grows at the same rate as the total return (including reinvested dividends) of Vanguard's VFIAX (500 Index Admiral).
I think that’s a great resource to (try at least) explain what those in favor of dividend clarity are talking about. If we’re talking about the same index, a fund that doesn’t pay dividends exactly tracks a fund that reinvests its dividends because in the non-dividend fund the NAV never drops due to the dividend. The share price diverges, but the total return does not. Thats the whole “9 shares at $10 each is the same as 10 shares at $9 each after the dividend” example.

Many dividend “enthusiasts(?)” believe the NAV catches up to what it would have been without the distribution [“the drop in the NAV is only temporary”] but if you look at a CIT that doesn’t pay dividends you can clearly see the difference. The NAV of VTIAX will always lag the NAV of the C fund because of the distribution, but the total return is the same.

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Re: How does time in mutual fund (VTSAX) affect quarterly dividend

Post by JustinR » Tue Feb 18, 2020 3:58 am

rossington wrote:
Mon Feb 17, 2020 1:20 pm
alex_686 wrote:
Mon Feb 17, 2020 10:49 am
rossington wrote:
Mon Feb 17, 2020 1:45 am
I agree completely, but the dividend payout date related price fluctuations are only temporary..... So my point (and I went off on a tangent from your original explanation) is that having the additional shares from dividend reinvestment is beneficial in a RISING stock market. When shares are appreciating in value if one needs to sell shares they will sell fewer shares thus holding more future shares. Even after tax considerations this is a positive effect on a portfolio.
Former mutual fund accountant who did performance reporting. This is mostly false. What you care about is total returns. The number of shares really don’t matter. There is a fair amount of marketing regulation around thus issue because it is inherently misleading.
Ok, but since fund ownership is denominated in shares that have a NAV at the end of the day... the only way to increase total return of a fund is 1) to have a static number of shares that you own hopefully appreciate in value over time, or 2) add to the position by owning more shares with the same expectation for price appreciation. Otherwise what is the point of reinvesting dividends or adding further contributions to the fund over time?
Am I missing something?
Think of it this way:

1) You have 1 share of a $100 stock = $100
2) A dividend of $5 is issued. You now have 1 share worth $95 + $5 in cash = $100. No value was created by distributing a dividend.
3) You reinvest the dividend. Now you have 1.0526 shares of a $95 stock = $100. No value was created by reinvesting the dividend.

So whether a dividend was reinvested (#3) or not distributed at all (#1) is exactly the same. No value was created and your wealth is exactly the same in both situations.

If the stock went up by 10% tomorrow, again - you'd be exactly the same place in both situations. You'd either have 1 share of a $110 stock, or 1.0526 shares of a $104.50 stock.

The number of shares doesn't matter, only the value of what you own...which is $100 in both situations.

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Re: How does time in mutual fund (VTSAX) affect quarterly dividend

Post by rossington » Tue Feb 18, 2020 4:17 am

alex_686 wrote:
Mon Feb 17, 2020 1:53 pm
Second, it might help if you realize that the only reason why mutual funds pays dividends is to generate reportable transactions to the IRS to calculate your taxes.
Mutual funds pay dividends to shareholders because dividends received from the underlying assets of the fund must be distributed proportionately to the shareholders.
My taxes are not the reason why I am receiving a dividend.
"Success is going from failure to failure without loss of enthusiasm." Winston Churchill.

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Re: How does time in mutual fund (VTSAX) affect quarterly dividend

Post by rossington » Tue Feb 18, 2020 5:56 am

JustinR wrote:
Tue Feb 18, 2020 3:58 am
rossington wrote:
Mon Feb 17, 2020 1:20 pm
alex_686 wrote:
Mon Feb 17, 2020 10:49 am
rossington wrote:
Mon Feb 17, 2020 1:45 am
I agree completely, but the dividend payout date related price fluctuations are only temporary..... So my point (and I went off on a tangent from your original explanation) is that having the additional shares from dividend reinvestment is beneficial in a RISING stock market. When shares are appreciating in value if one needs to sell shares they will sell fewer shares thus holding more future shares. Even after tax considerations this is a positive effect on a portfolio.
Former mutual fund accountant who did performance reporting. This is mostly false. What you care about is total returns. The number of shares really don’t matter. There is a fair amount of marketing regulation around thus issue because it is inherently misleading.
Ok, but since fund ownership is denominated in shares that have a NAV at the end of the day... the only way to increase total return of a fund is 1) to have a static number of shares that you own hopefully appreciate in value over time, or 2) add to the position by owning more shares with the same expectation for price appreciation. Otherwise what is the point of reinvesting dividends or adding further contributions to the fund over time?
Am I missing something?
Think of it this way:

1) You have 1 share of a $100 stock = $100
2) A dividend of $5 is issued. You now have 1 share worth $95 + $5 in cash = $100. No value was created by distributing a dividend.
3) You reinvest the dividend. Now you have 1.0526 shares of a $95 stock = $100. No value was created by reinvesting the dividend.

So whether a dividend was reinvested (#3) or not distributed at all (#1) is exactly the same. No value was created and your wealth is exactly the same in both situations.

If the stock went up by 10% tomorrow, again - you'd be exactly the same place in both situations. You'd either have 1 share of a $110 stock, or 1.0526 shares of a $104.50 stock.

The number of shares doesn't matter, only the value of what you own...which is $100 in both situations.
But we should be assuming that 1,2, and 3 are the same fund (not separate).

In example 2) after the $5 dividend is issued and you DO NOT reinvest it then your $5 is earning nothing. Thus your $95 share going up by 10% is now worth $104.50 only and you have the extra $5 not appreciating anymore for a value of $109.50. So having the $5 reinvested gives you the $110...a slight advantage in our example here. What if the share price goes up by another 10%? The $104.50 is now worth $114.95 + $5 =$119.50 but the $110 share is now worth $121. Now multiply this advantage by hundreds or thousands of additional shares through reinvesting the dividends,plus additional contributions to the fund(s) and with the added benefit of compounding over time = greater total return.
"Success is going from failure to failure without loss of enthusiasm." Winston Churchill.

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Re: How does time in mutual fund (VTSAX) affect quarterly dividend

Post by alex_686 » Tue Feb 18, 2020 6:42 am

rossington wrote:
Tue Feb 18, 2020 4:17 am
alex_686 wrote:
Mon Feb 17, 2020 1:53 pm
Second, it might help if you realize that the only reason why mutual funds pays dividends is to generate reportable transactions to the IRS to calculate your taxes.
Mutual funds pay dividends to shareholders because dividends received from the underlying assets of the fund must be distributed proportionately to the shareholders.
My taxes are not the reason why I am receiving a dividend.
Why must they be distributed? If you are concerned about proportional then the better option would not be to pay the dividends and just let the dividends accumulate in a higher NAV. After all, a person gets the same dividend if they hold a fund a year or a day before ex-div date.

And the accountants hate the work. Its fiddly, driven by tax regs. I can’t think of a SEC reg that was part of the process.

Irish accumulating funds seem to do just fine.

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Re: How does time in mutual fund (VTSAX) affect quarterly dividend

Post by JustinR » Tue Feb 18, 2020 6:51 am

rossington wrote:
Tue Feb 18, 2020 5:56 am
JustinR wrote:
Tue Feb 18, 2020 3:58 am
rossington wrote:
Mon Feb 17, 2020 1:20 pm
alex_686 wrote:
Mon Feb 17, 2020 10:49 am
rossington wrote:
Mon Feb 17, 2020 1:45 am
I agree completely, but the dividend payout date related price fluctuations are only temporary..... So my point (and I went off on a tangent from your original explanation) is that having the additional shares from dividend reinvestment is beneficial in a RISING stock market. When shares are appreciating in value if one needs to sell shares they will sell fewer shares thus holding more future shares. Even after tax considerations this is a positive effect on a portfolio.
Former mutual fund accountant who did performance reporting. This is mostly false. What you care about is total returns. The number of shares really don’t matter. There is a fair amount of marketing regulation around thus issue because it is inherently misleading.
Ok, but since fund ownership is denominated in shares that have a NAV at the end of the day... the only way to increase total return of a fund is 1) to have a static number of shares that you own hopefully appreciate in value over time, or 2) add to the position by owning more shares with the same expectation for price appreciation. Otherwise what is the point of reinvesting dividends or adding further contributions to the fund over time?
Am I missing something?
Think of it this way:

1) You have 1 share of a $100 stock = $100
2) A dividend of $5 is issued. You now have 1 share worth $95 + $5 in cash = $100. No value was created by distributing a dividend.
3) You reinvest the dividend. Now you have 1.0526 shares of a $95 stock = $100. No value was created by reinvesting the dividend.

So whether a dividend was reinvested (#3) or not distributed at all (#1) is exactly the same. No value was created and your wealth is exactly the same in both situations.

If the stock went up by 10% tomorrow, again - you'd be exactly the same place in both situations. You'd either have 1 share of a $110 stock, or 1.0526 shares of a $104.50 stock.

The number of shares doesn't matter, only the value of what you own...which is $100 in both situations.
But we should be assuming that 1,2, and 3 are the same fund (not separate).

In example 2) after the $5 dividend is issued and you DO NOT reinvest it then your $5 is earning nothing. Thus your $95 share going up by 10% is now worth $104.50 only and you have the extra $5 not appreciating anymore for a value of $109.50. So having the $5 reinvested gives you the $110...a slight advantage in our example here. What if the share price goes up by another 10%? The $104.50 is now worth $114.95 + $5 =$119.50 but the $110 share is now worth $121. Now multiply this advantage by hundreds or thousands of additional shares through reinvesting the dividends,plus additional contributions to the fund(s) and with the added benefit of compounding over time = greater total return.
I specifically said that #1 and #3 are the same. I included #2 in there to show you that no value is created from #1 -> #3. Obviously if you don't reinvest the $5 you will have less money growing in the stock market.

A reinvested dividend is like the Company giving you back $5 out of $100. And then you putting it back and now you have $100 invested again. You're not actually accomplishing anything, or gaining any benefits/advantages, in the process.

The point everyone is trying to make is that #3 (after reinvesting the dividend) is exactly the same as #1 (before the dividend is issued). All your posts in this thread are about "number of shares", and the point is that reinvested dividends increasing your number of shares doesn't mean anything...it does not create value for you at all (compared to before the dividend was distributed). You are equally wealthy before and after the dividend and the # of shares doesn't matter at all.

So back to the original point of this thread, buying the stock before or after the dividend doesn't matter (taxes aside). Investing $100 into the stock before the dividend or $100 after the dividend is exactly the same.
Last edited by JustinR on Tue Feb 18, 2020 8:02 am, edited 3 times in total.

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neurosphere
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Re: How does time in mutual fund (VTSAX) affect quarterly dividend

Post by neurosphere » Tue Feb 18, 2020 7:45 am

rossington wrote:
Tue Feb 18, 2020 5:56 am
In example 2) after the $5 dividend is issued and you DO NOT reinvest it then your $5 is earning nothing.
I understand what you are trying to explain, but your choice of words is (understandably) confusing people, and it's also not clear whether it is you who are confused, so the conversation gets muddled.

What if I turn your example around a little bit...

Dividends represent cash, taken out of a fund, and paid to you rather than reinvested by the fund itself. At that point you have a choice. 1) keep the cash or 2) give that cash back to the fund in order to stay invested.

Over time, stocks and bond funds typically go up so the more of one's return which stays invested, the greater the profit.

But reinvesting the dividends is not an "advantage". Instead it's a necessary process to counteract the disadvantage of the "cash drag" of money which is not invested. Compared to an identical fund which does not pay out the dividends to shareholders, but rather reinvests them internally, one NEEDS to reinvest the dividends simply to keep pace.

But your overall point is indeed true. If one simply never reinvests the dividends, one will (usually) have less money over time, because cash earns less than "investments" (usually). :D

I consider dividends a form of "forced sale" of some of my investment, that I need to "buy back" in order to stay invested. In taxable accounts, I may use the proceeds from that sale (the dividend) to buy a DIFFERENT investment (to rebalance) and sometimes I need that money to pay the bills and it saves me from having to actually hit the "sell shares" button. :wink:
If you have to ask "Is a Target Date fund right for me?", the answer is "Yes".

rossington
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Re: How does time in mutual fund (VTSAX) affect quarterly dividend

Post by rossington » Wed Feb 19, 2020 1:51 am

neurosphere wrote:
Tue Feb 18, 2020 7:45 am
rossington wrote:
Tue Feb 18, 2020 5:56 am
In example 2) after the $5 dividend is issued and you DO NOT reinvest it then your $5 is earning nothing.
I understand what you are trying to explain, but your choice of words is (understandably) confusing people, and it's also not clear whether it is you who are confused, so the conversation gets muddled.

What if I turn your example around a little bit...

Dividends represent cash, taken out of a fund, and paid to you rather than reinvested by the fund itself. At that point you have a choice. 1) keep the cash or 2) give that cash back to the fund in order to stay invested.

Over time, stocks and bond funds typically go up so the more of one's return which stays invested, the greater the profit.

But reinvesting the dividends is not an "advantage". Instead it's a necessary process to counteract the disadvantage of the "cash drag" of money which is not invested. Compared to an identical fund which does not pay out the dividends to shareholders, but rather reinvests them internally, one NEEDS to reinvest the dividends simply to keep pace.

But your overall point is indeed true. If one simply never reinvests the dividends, one will (usually) have less money over time, because cash earns less than "investments" (usually). :D

I consider dividends a form of "forced sale" of some of my investment, that I need to "buy back" in order to stay invested. In taxable accounts, I may use the proceeds from that sale (the dividend) to buy a DIFFERENT investment (to rebalance) and sometimes I need that money to pay the bills and it saves me from having to actually hit the "sell shares" button. :wink:
:thumbsup :sharebeer
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