Does it matter if you sell Vanguard TIPS fund before or after ex-div date?

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privateID
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Does it matter if you sell Vanguard TIPS fund before or after ex-div date?

Post by privateID »

I thought the price of Vanguard's TIPS fund (VAIPX) will correspondingly go down after the quarterly dividend. So, if you were selling and you want to take the amount of the dividend as a capital gain, you would sell before the ex-div date and if you wanted to take the amount of the dividend as ordinary income you could wait till after the ex-div date. I wanted to verify this. I called Vanguard, but didn't get that comfortable feeling that the guy really knew. Can anyone confirm this? I realize this may not be so much money, but on a large sale with a large dividend coming it could be.
livesoft
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Re: Does it matter if you sell Vanguard TIPS fund before or after ex-div date?

Post by livesoft »

It does not matter whether the price of VAIPX goes down or not when the dividend is paid. You will get what is fairly yours.

Some bond fund shares have the dividend embedded in the NAV such as VSCSX and some don't such at VBTLX. The NAV of VSCSX drops when the dividend is paid, but the NAV of VBTLX does not drop when the monthly dividend is paid. That's because the accrued dividend is held "elsewhere" for VBTLX.

In order to know which method VAIPX uses, one has to read the prospectus which all share buyers always do, right? :) I have never owned shares of VAIPX, so I have not read the prospectus.
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privateID
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Re: Does it matter if you sell Vanguard TIPS fund before or after ex-div date?

Post by privateID »

livesoft wrote: Tue Nov 23, 2021 1:27 pm In order to know which method VAIPX uses, one has to read the prospectus which all share buyers always do, right? :)
I can honestly say I have never read a prospectus from front to back. I have looked things up from time to time. As for this, your post prompted me to do just that. Of course, after 10 minutes of looking (my max attention span), I did not find what I was looking for. I did find this example:
Unless you are a tax-exempt investor or investing through a tax-advantaged account (such as an IRA or an employer-sponsored retirement or savings plan), you should consider avoiding a purchase of fund shares shortly before the fund makes a distribution, because doing so can cost you money in taxes. This is known as “buying a dividend.” For example: On December 15, you invest $5,000, buying 250 shares for $20 each. If the fund pays a distribution of $1 per share on December 16, its share price will drop to $19 (not counting market change). You still have only $5,000 (250 shares x $19 = $4,750 in share value, plus 250 shares x $1 = $250 in distributions), but you owe tax on the $250 distribution you received—even if you reinvest it in more shares. To avoid buying a dividend, check a fund’s distribution schedule before you invest.
That certainly sounds like the NAV gets adjusted by the dividend. I also took a look at the NAV history over the dividend dates, but couldn't conclude anything from that. So, I think what I said is correct - the NAV gets adjusted by the dividend. But still not positive.
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Re: Does it matter if you sell Vanguard TIPS fund before or after ex-div date?

Post by livesoft »

privateID wrote: Tue Nov 23, 2021 2:40 pmThat certainly sounds like the NAV gets adjusted by the dividend. I also took a look at the NAV history over the dividend dates, but couldn't conclude anything from that. So, I think what I said is correct - the NAV gets adjusted by the dividend. But still not positive.
OK, so the NAV of the fund changes when the dividend is paid to you. So it seems you got it figured out to me.
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privateID
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Re: Does it matter if you sell Vanguard TIPS fund before or after ex-div date?

Post by privateID »

livesoft wrote: Tue Nov 23, 2021 2:50 pm
privateID wrote: Tue Nov 23, 2021 2:40 pmThat certainly sounds like the NAV gets adjusted by the dividend. I also took a look at the NAV history over the dividend dates, but couldn't conclude anything from that. So, I think what I said is correct - the NAV gets adjusted by the dividend. But still not positive.
OK, so the NAV of the fund changes when the dividend is paid to you. So it seems you got it figure out to me.
Always prefer to hear from someone who actually did it. Basing my info on an example where otherwise I do not see it spelled out does not make me so comfortable.
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Re: Does it matter if you sell Vanguard TIPS fund before or after ex-div date?

Post by tetractys »

Yea, VAIPX doesn’t pay monthly dividends, it accrues. And it has other distributions—see its history.

This fund is best for tax sheltered accounts—beware!
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Re: Does it matter if you sell Vanguard TIPS fund before or after ex-div date?

Post by privateID »

Thank you. My next question: Is there a way to estimate what the next TIPS dividend for a TIPS fund will be? Seems like we would have at least 2 full months of data. Will it be the biggest dividend of the year?
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Re: Does it matter if you sell Vanguard TIPS fund before or after ex-div date?

Post by grabiner »

tetractys wrote: Tue Nov 23, 2021 4:16 pm Yea, VAIPX doesn’t pay monthly dividends, it accrues. And it has other distributions—see its history.

This fund is best for tax sheltered accounts—beware!
Actually, it's pretty good in a taxable account (although I-Bonds are better since they are tax deferred).

Dividends are exempt from state tax. Capital gains are subject to state tax in most states (NJ won't tax them, but I believe most other states will). And since TIPS are the least risky bonds, they tend to have relatively low yields, and thus a lower total tax cost. In a 24% or lower bracket, I would expect Treasury and TIPS funds to be the most tax-friendly bond funds. In a 32% or higher bracket, I would prefer munis. (The "tax cost" of munis is the difference between muni yields and the yields of corporate bonds of comparable risk; you give up 0.5% if you hold a 1.5% muni when you could buy a 2% corporate bond in a tax-free account.)
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Re: Does it matter if you sell Vanguard TIPS fund before or after ex-div date?

Post by OkanePlease »

privateID wrote: Tue Nov 23, 2021 4:00 pm
livesoft wrote: Tue Nov 23, 2021 2:50 pm
privateID wrote: Tue Nov 23, 2021 2:40 pmThat certainly sounds like the NAV gets adjusted by the dividend. I also took a look at the NAV history over the dividend dates, but couldn't conclude anything from that. So, I think what I said is correct - the NAV gets adjusted by the dividend. But still not positive.
OK, so the NAV of the fund changes when the dividend is paid to you. So it seems you got it figure out to me.
Always prefer to hear from someone who actually did it. Basing my info on an example where otherwise I do not see it spelled out does not make me so comfortable.
I'm in a similar boat with this question (recall that I had a different post asking about switching my TIPS fund from a taxable to a tax-deferred account), so I called Schwab to ask about their TIPS fund and dividend payout. They said that someone who owns the fund a day or two before the ex-dividend date gets the same exact dividend as a person who has owned the same number of shares for the entire quarter. Sell before the ex-dividend date and you get no dividends. In other words, no pro-rations.

I then asked about the impact of dividends on the NAV. The rep asked two different people and was told both times that the NAV typically drops downward to account for the dividend payout. ("There are less funds in the overall mutual fund upon payout, so the NAV has to drop to account for that.") I knew this happened for capital gains, but I didn't know it happened for dividends. (And I'm still not sure that's true for other funds, such as a Total Bond Fund.) It would be a bit hard to know, the rep agreed, given that the NAV drop after the end of March dividend was only 2 cents. But in June it was 8 cents, while in September it was 15 cents.
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Re: Does it matter if you sell Vanguard TIPS fund before or after ex-div date?

Post by alex_686 »

I used to work fund accounting. Dividends is all about journal entries. No economic impact nor is it tied to economic returns.

The NAV falls exactly by the amount of the distribution. The distribution ties to the amount of taxable income the fund has had.

The NAV price may not fall exactly by the amount of the distribution. After all there are other factors that push the NAV up and down.

The distribution amounts can change from period to period. After all, it is tied to taxable events, not economic events. There are many timing issues that can affect the exact period of the recognition of income.

To the OP, yeah, you plan broadly speaking works. There are a fair number of issues that can trip you up, like wash sales, constructive sales, etc.
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Re: Does it matter if you sell Vanguard TIPS fund before or after ex-div date?

Post by OkanePlease »

alex_686 wrote: Fri Nov 26, 2021 1:17 pm I used to work fund accounting. Dividends is all about journal entries. No economic impact nor is it tied to economic returns.

The NAV falls exactly by the amount of the distribution. The distribution ties to the amount of taxable income the fund has had.

The NAV price may not fall exactly by the amount of the distribution. After all there are other factors that push the NAV up and down.

The distribution amounts can change from period to period. After all, it is tied to taxable events, not economic events. There are many timing issues that can affect the exact period of the recognition of income.

To the OP, yeah, you plan broadly speaking works. There are a fair number of issues that can trip you up, like wash sales, constructive sales, etc.
Thanks, Alex_686. This may sound naive, but now I'm confused: What's the point of a dividend, then? If the NAV falls by the amount of the distribution, then how is my mutual fund actually "earning" anything (the point of a dividend, I thought!)?

And is the NAV falling the premise for all mutual funds? I thought I've seen my total bond fund NAV rise on numerous occasions when dividends were distributed.
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Re: Does it matter if you sell Vanguard TIPS fund before or after ex-div date?

Post by alex_686 »

OkanePlease wrote: Fri Nov 26, 2021 8:55 pm Thanks, Alex_686. This may sound naive, but now I'm confused: What's the point of a dividend, then? If the NAV falls by the amount of the distribution, then how is my mutual fund actually "earning" anything (the point of a dividend, I thought!)?

And is the NAV falling the premise for all mutual funds? I thought I've seen my total bond fund NAV rise on numerous occasions when dividends were distributed.
The sole purpose of mutual fund dividends is to generate "reportable transactions" so you get a 1099 so you can do your taxes. Its what 1/3 of our accountants did all year. Calculate and classify income so we could distribute appropriately. There are other options that work better, such as CIT. But these have to be limited to tax advantaged accounts.

https://www.bogleheads.org/wiki/Collect ... ent_Trusts

I often compare dividends to Aristotelian physics, where heavy objects fall faster than lighter one. It is intuitive, explains lots of things, but worse than useless as a foundational theory.

You buy a fund for "Total Return". Is a $1 of dividends worth more than a $1 of capital appreciation? No, both are worth a dollar.

And you don't sound naïve - this is a very common mistake. It requires some knowledge of either accounting of investment theory and even then I have seen people get tripped up.
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Re: Does it matter if you sell Vanguard TIPS fund before or after ex-div date?

Post by OkanePlease »

alex_686 wrote: Fri Nov 26, 2021 9:51 pm
OkanePlease wrote: Fri Nov 26, 2021 8:55 pm Thanks, Alex_686. This may sound naive, but now I'm confused: What's the point of a dividend, then? If the NAV falls by the amount of the distribution, then how is my mutual fund actually "earning" anything (the point of a dividend, I thought!)?

And is the NAV falling the premise for all mutual funds? I thought I've seen my total bond fund NAV rise on numerous occasions when dividends were distributed.
The sole purpose of mutual fund dividends is to generate "reportable transactions" so you get a 1099 so you can do your taxes. Its what 1/3 of our accountants did all year. Calculate and classify income so we could distribute appropriately. There are other options that work better, such as CIT. But these have to be limited to tax advantaged accounts.

https://www.bogleheads.org/wiki/Collect ... ent_Trusts

I often compare dividends to Aristotelian physics, where heavy objects fall faster than lighter one. It is intuitive, explains lots of things, but worse than useless as a foundational theory.

You buy a fund for "Total Return". Is a $1 of dividends worth more than a $1 of capital appreciation? No, both are worth a dollar.

And you don't sound naïve - this is a very common mistake. It requires some knowledge of either accounting of investment theory and even then I have seen people get tripped up.
Alex_686, your replies have been helpful. One more (naive?) question, related to the thread and hopefully not hijacking it. Is it possible to strategically sell "between" the ex-dividend date and the distribution dividend date (is that the "record date"?) such that one gets the dividend but doesn't suffer the corresponding drop in share price?
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Re: Does it matter if you sell Vanguard TIPS fund before or after ex-div date?

Post by alex_686 »

OkanePlease wrote: Sun Nov 28, 2021 8:00 pm Alex_686, your replies have been helpful. One more (naive?) question, related to the thread and hopefully not hijacking it. Is it possible to strategically sell "between" the ex-dividend date and the distribution dividend date (is that the "record date"?) such that one gets the dividend but doesn't suffer the corresponding drop in share price?
Let me rephrase the question: Can I have my cake and eat it too? Is there a trick where I can create free and risk-free money?

No, not really. The theory behind it is the: No Arbitrage Price. There is a ongoing hunt for weird statistically significant exploits. These fleeting aberrations require a fair amount of sophistication to find and exploit.
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Re: Does it matter if you sell Vanguard TIPS fund before or after ex-div date?

Post by livesoft »

OkanePlease wrote: Fri Nov 26, 2021 8:55 pm And is the NAV falling the premise for all mutual funds? I thought I've seen my total bond fund NAV rise on numerous occasions when dividends were distributed.
The NAV of Vanguard Total Bond Index fund does NOT drop when it pays its monthly dividend. That's because, as the prospectus states, "Income dividends generally are declared daily and distributed monthly;" That is different from VAIPX: "Income dividends are generally declared
and distributed quarterly in March, June, September, and December;"
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Re: Does it matter if you sell Vanguard TIPS fund before or after ex-div date?

Post by OkanePlease »

livesoft wrote: Sun Nov 28, 2021 8:42 pm
OkanePlease wrote: Fri Nov 26, 2021 8:55 pm And is the NAV falling the premise for all mutual funds? I thought I've seen my total bond fund NAV rise on numerous occasions when dividends were distributed.
The NAV of Vanguard Total Bond Index fund does NOT drop when it pays its monthly dividend. That's because, as the prospectus states, "Income dividends generally are declared daily and distributed monthly;" That is different from VAIPX: "Income dividends are generally declared
and distributed quarterly in March, June, September, and December;"
Thanks, livesoft! I had overlooked your comment upthread.
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Re: Does it matter if you sell Vanguard TIPS fund before or after ex-div date?

Post by livesoft »

But let me add to your knowledge by asking this question: What about BND which is the Vanguard Total Bond Market Index ETF? :twisted:
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Re: Does it matter if you sell Vanguard TIPS fund before or after ex-div date?

Post by alex_686 »

livesoft wrote: Sun Nov 28, 2021 8:42 pm
OkanePlease wrote: Fri Nov 26, 2021 8:55 pm And is the NAV falling the premise for all mutual funds? I thought I've seen my total bond fund NAV rise on numerous occasions when dividends were distributed.
The NAV of Vanguard Total Bond Index fund does NOT drop when it pays its monthly dividend.
Yes, the prices does drop. You are making this more complex than it really is. Let me quote and rewrite you so you can see it is a generalized process that works the same for all funds.

That's because, as the prospectus states, "Income dividends generally are declared daily (a.k.a. goes Ex-Div daily) and distributed monthly (a.k.a. All distributions, regardless of the ex-div date, have a Record Date at the end of the month);"

I will admit that this is a bit abstract. And since it is continuous you don't see a large drop on the Record Date. You have to look at the ex-div dates. It helps if you have access to the daily reported accounting data.
livesoft wrote: Mon Nov 29, 2021 8:19 am But let me add to your knowledge by asking this question: What about BND which is the Vanguard Total Bond Market Index ETF? :twisted:
Well, what do you want to know?

The fund earns income daily. This is apportioned between the different share classes and is entered into the "income" account ledger on the Income Statement.

On Record Date, there is a journal entry that transfers a balance from the income ledger to the "dividends payable" ledger. It really does not matter if the frequency is daily, monthly, etc.

On Payable Date you disburse the funds.
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Re: Does it matter if you sell Vanguard TIPS fund before or after ex-div date?

Post by livesoft »

alex_686 wrote: Mon Nov 29, 2021 10:09 am Well, what do you want to know?
Unlike VBTLX, the price of BND drops on its ex-dividend date by the amount of the dividend, then carries on from there.

Unlike BND, if one sells all their shares of VBTLX intra-month, then one also gets the accrued part of the monthly dividend paid to them separately at that time.
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Re: Does it matter if you sell Vanguard TIPS fund before or after ex-div date?

Post by alex_686 »

livesoft wrote: Mon Nov 29, 2021 10:13 am
alex_686 wrote: Mon Nov 29, 2021 10:09 am Well, what do you want to know?
Unlike VBTLX, the price of BND drops on its ex-dividend date by the amount of the dividend, then carries on from there.

Unlike BND, if one sells all their shares of VBTLX intra-month, then one also gets the accrued part of the monthly dividend paid to them separately at that time.
I am still not sure what your exact question is. Maybe some solid numbers would help things.

On Friday, 10/1/2021, the fund earned income of $0.001675656 per share. This covered the income for 3 days, Friday, Saturday and Sunday becuase it is a "forwards" looking fund. (Well, not quite. The size of the slice of the 2 shares classes are different, resulting if different values. A share of BND is not quite 8 times as big. We would need to find the correct adjusting factor. But let us pretend they are both the same size in this example.)

This income increases the NAV for the fund by $0.001675656 per share.

VBTLX declared on 10/1/2021 a dividend of $0.001675656 with a Ex-Div Date & Record date of 10/01/2021 with a payable date of 11/01/2021. VBTLX NAV falls by $0.001675656 since it has gone ex-div.

BND's NAV goes up by $0.001675656 per share. Income will accrue so the NAV will increase.

On Monday, 10/4/2021 the fund generates $0.000557818 income per share. VBTLX pays it out immediately with a payable date of 11/01/2021. BND just keeps on accruing income.

So, between 10/01/2021 and 10/29/2021 the fund has earned $0.17501359 per share.

VBTLX has declared 21 dividends with a payable date of 11/01.

If you cash early out of VBTLX they will pay out the dividends early.

BND declares it's ex-div date on 10/28 for the prior month. Note the dates don't exactly match up with VBTLX but that has no impact.

If you cash out of BND early you still get the income becuase it is built into the NAV.
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Re: Does it matter if you sell Vanguard TIPS fund before or after ex-div date?

Post by livesoft »

My point was the same as I made in my first response:
livesoft wrote: Tue Nov 23, 2021 1:27 pm It does not matter whether the price of VAIPX goes down or not when the dividend is paid. You will get what is fairly yours.

Some bond fund shares have the dividend embedded in the NAV such as VSCSX and some don't such at VBTLX. The NAV of VSCSX drops when the dividend is paid, but the NAV of VBTLX does not drop when the monthly dividend is paid. That's because the accrued dividend is held "elsewhere" for VBTLX.
VBTLX and BND have different mechanisms for paying the monthly dividend which has weirded people out based on past threads at bogleheads.org, but one always gets what is fairly theirs in all instances. Of course, this is nothing new to you or to others who have seen this story before.
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