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Dividends are payments made by a corporation to its shareholder members. Mutual fund dividends are the distribution to a mutual fund shareholder for a share of interest and dividends paid to the fund by the assets held in the fund.

Stock dividends

  1. A distribution of a portion of a company's earnings, decided by the board of directors, to a class of its shareholders. The dividend is most often quoted in terms of the dollar amount each share receives (dividends per share). It can also be quoted in terms of a percent of the current market price, referred to as dividend yield. Dividends may be in the form of cash, stock or property. Most secure and stable companies offer dividends to their stockholders. Their share prices might not move much, but the dividend attempts to make up for this. High-growth companies rarely offer dividends because all of their profits are reinvested to help sustain higher-than-average growth.
    Also referred to as "Dividend Per Share (DPS)."

  2. Mandatory distributions of income and realized capital gains made to mutual fund investors. In addition, realized capital gains from the portfolio's trading activities are generally paid out (capital gains distribution) as a year-end dividend.

Dividends are payments made by a corporation to its shareholder members. It is the portion of corporate profits paid out to stockholders. When a corporation earns a profit or surplus, that money can be put to two uses: it can either be re-invested in the business (called retained earnings), or it can be paid to the shareholders as a dividend. Many corporations retain a portion of their earnings and pay the remainder as a dividend.[1] In other words, payment of a dividend is based on many factors and can only be decided by the corporation issuing the stock.

The decision to invest in dividend paying stocks versus stocks that do not pay dividends is uncertain at best. There are many reasons to support either position, as well as tax implications for both the issuing corporation and the stockholder.[2]

Mutual fund dividends

When you are paid a dividend from a mutual fund, it is not a payment "for keeping your money in the fund for a year," but rather it is a net after expense distribution to you of your share of interest and dividends paid to the fund by the assets held in the fund. The fund is required to make such a distribution, and the fund is required to decrease the net asset value (NAV) accordingly, as after the payout the fund holds less wealth. This is true of most equity funds, but not of bond funds.[3]

Your interest in holding a fund is the total return on your investment, which is increase in NAV plus value of distributions. If the fund NAV at the end of the year, after distributions, is actually less than the fund NAV at the beginning of the year, then the capital gain return for that year may have been negative. If you add to that the total of distributions received, the result may still be negative, or it may be positive.

It is generally the case that both stock and bond funds have an expectation of positive total return in a year, but actual results in a year can vary widely, and do include negative total returns in some years.

Dividend distributions

Dividend distribution in a mutual fund represents not only bond interest but also stock dividends accumulated in the NAV since the previous distribution.[4]

Dividend distributions are accumulated in the fund's NAV all year long. Then when paid, the fund is reduced by that dividend amount. (This is not true of most Vanguard bond funds, as noted above. See Net asset value (NAV) for more detail.) If dividends are reinvested, then you simply receive additional shares that equal the dividend amount times the number of shares you already owned.

The distributions can be considered as a bookkeeping tool to get stock dividends and bond interest income off the books and out to investors either by reinvestment in additional shares or as a cash payment.

For example:You own 500 shares at $11 per share at year-end, for a total worth of $5,500. There is a $1 per share dividend. Therefore, net of accumulated dividends in the fund, your fund is worth $10 per share. Assuming dividends are reinvested, you'll get $500 ($1 x 500 shares) reinvested in the fund. $500 / $10 per share = 50 additional shares. Now you own 550 shares at $10 each, which equals your original $5,500.

Except for taxes in a taxable account, there is no reason to "time" the dividend in a mutual fund.

Dividend distributions and fund prices

If your fund is paying out a dividend and/or capital gains distribution (sometimes quarterly, often annually), the NAV of the fund will drop by the per share amount of the distributions on the ex-dividend date.[5] The investor's economic position is not changed by the distributions, regardless of whether the distributions are re-invested in the fund or taken in cash. Substantial drops in NAV from distributions most often occur in December, when many funds are paying annual dividend and capital gains distributions, especially if the distributions are large.

Dates and Timing

There are four dates associated with dividends: [6]

  • Declaration Date - company announces that it will be issuing a dividend in the future
  • Record Date - company examines its current list of shareholders to determine who will receive dividends
  • Ex-Dividend Date - determines which of these shareholders will be entitled to receive the dividend
  • Payable Date - dividend is actually paid to eligible shareholders

If you own shares on the record date, you will receive the dividend.

For mutual funds, the record date is one business day before the ex-dividend date. For ETFs, the record date is one business day after the ex-dividend date. The two day difference between mutual funds and ETFs is due to the 2-day settlement period for ETFs (and stocks). Therefore, the following holds for both mutual funds and ETFs:

  • If you buy shares on or after the ex-dividend date, you will not receive the dividend. If you buy shares before the ex-dividend date, you will receive the dividend.
  • If you sell shares on or after the ex-dividend date, you will receive the dividend. If you sell shares before the ex-dividend date, you will not receive the dividend.

Vanguard says that their payable date will usually be 2-4 business days after the record date.[7]

For mutual funds, Vanguard uses the term Reinvest Date instead of Ex-Dividend Date.

End-of-year Distributions

  • Vanguard provides dates for end-of-year dividends in early November,[8] estimated capital gains in mid-November,[9] estimated qualified dividend percentages in mid-November,[10] and updated estimates for capital gains, dividends, and qualified dividend percentages in early December.[11]
  • Fidelity provides dates and estimates for end-of-year capital gains.[12]
  • Schwab provides dates and estimates for end-of-year capital gains.[13]

See also


  1. Dividend, on Wikipedia
  2. Black, Fischer. "The Dividend Puzzle." Journal of Portfolio Management, 2 (1976), pp. 58., on Google Books.
  3. Net asset value
  4. Bogleheads forum topic: "I don't understand how i made any money 2030 fund"
  5. Mutual Fund Definition of Ex & Record Dates, Tim Plaehn. zacks.com, viewed 24 December, 2014.
  6. Ex-Dividend Date, Jason Fernando. investopedia.com, viewed 5 December, 2020.
  7. e.g. VTSAX distribution page, vanguard.com, click on "Payable date" for definition, viewed 13 December, 2020.
  8. Schedule of dividend distributions, vanguard.com, viewed 13 December 2020.
  9. Preliminary capital gains estimates, vanguard.com, viewed 13 December 2020.
  10. Qualified dividend income, vanguard.com, viewed 13 December 2020.
  11. Estimated year-end distributions, vanguard.com, viewed 13 December 2020.
  12. Distributions by Fidelity Mutual Funds, fidelity.com, viewed 15 December 2020.
  13. Schwab Funds Estimated Annual Distributions, schwabfunds.com, viewed 15 December 2020.

External links