Vanguard funds: distribution methodology

The methodology for calculating the Vanguard fund distributions is not currently documented. I obtained background information from User:Blbarnitz. Assistance is more than welcome from anyone experienced in this area. Please feel free to edit this page directly. --LadyGeek 17:30, 2 January 2011 (EST)

Dividends
Dividends are obtained from the fund's annual report, not the fund's web site. Vanguard provides the following explanation in its financial statement footnotes.

"Distributions are determined on a tax basis and may differ from net investment income and realized capital gains for financial reporting purposes. Differences may be permanent or temporary. Permanent differences are reclassified among capital accounts in the financial statements to reflect their tax character. Temporary differences arise when certain items of income, expense, gain, or loss are recognized in different periods for financial statement and tax purposes; these differences will reverse at some time in the future. Differences in classification may also result from the treatment of short-term gains as ordinary income for tax purposes."

Translation: If the fund does not have a fiscal year that corresponds with the calendar tax year, the dividend may not correspond with a given fund's December year-end dividend distribution.

For example, a fund may have a fiscal year ending in August 2010 or October 2010. Thus, the reported income reflects any dividend earnings accrued or distributed during the fall of 2009 and the months in 2010 prior to the end of the fiscal year. By law, a fund must distribute all realized income. Therefore, if a fund with an August or October fiscal year (FY) distributes a dividend or a capital gain in December 2010, the dividends and gain will be reflected in the dividends and capital gains in the FY 2011 annual report.

Vanguard's annual report defines Dividend Yield as follows:

Dividend income earned by stocks, expressed as a percentage of the aggregate market value (or of net asset value, for a fund). The yield is determined by dividing the amount of the annual dividends by the aggregate value (or net asset value) at the end of the period. For a fund, the dividend yield is based solely on stock holdings and does not include any income produced by other investments.

Translation: Dividend is actually a yield, and reported as the Ratio of Net Investment Income to Average Net Assets. This reported figure is a permanent record of the long-term history of distributions which, along with other accounting data, can provide insight into the fundamental drivers for this distribution, as well as show the potential for future distributions. Reported yield numbers are convenient when researching for 10-15 years of fund yield data, which are filed in the SEC's EDGAR database.


 * The investment income reported in the yield calculation may include short term capital gains income, which is taxed as current income. (It's unclear where this short term gain is reported, or whether it is reported in the capital gains distribution.)

Funds with a December 31 fiscal year: The per share dividend income and distributed net income figure are very close and are likely the result of small "supplementary" distributions the funds often make during the early months of the ensuing year.

Capital gains
Capital gains are derived from annual reports, and are calculated by dividing the per share capital gain distribution by the beginning year NAV. In the annual report:


 * Capital gain % = (-Distributions from Realized Capital Gains) / (Net Asset Value, Beginning of Period) * 100%

The distribution is a negative number, as it is used to calculate Net Asset Value.

Expressing the capital gain distribution as a "yield" allows one to conceptualize the distribution in a consistent, familiar metric similar to the dividend yield percentage (above).

To be completely consistent with yield and expense ratio calculations, an average fund's net assets should be used. Unfortunately, funds do not report an average net asset figure. As a compromise, the best way to estimate capital gain percentage is to divide the per-share capital gain distribution by the beginning year net asset value, as previously described.

Rationale: A fund starts the year with a $10.00 NAV. Over the year, it rises in value by 10% to an $11.00 NAV and distributes a $0.50 capital gain, resulting in a year-end NAV of $10.50. The $0.50 distribution represents a 5.00% gain for the year.


 * 5.0 % capital gain "yield" = $0.50 / $10.00 * 100%

Qualifying Dividends
??? Vanguard has not released 2010 QDI information. How is this calculated? Vanguard FTSE All-World ex-US Index Fund Tax Distributions can be one example.

Foreign Tax Credit
??? Where in the annual report? Vanguard FTSE All-World ex-US Index Fund Tax Distributions can be one example.

The foreign tax credit is estimated from annual reports by:


 * 1) Dividing the foreign tax paid into the foreign source income received
 * 2) Multiplying this result into the reported dividend yield.