Something baffling happened on Monday

[Tim1965]

My Schwab total stock market index fund (SWTSX) was down 2% even though the Nasdaq, S&P 500, and Dow Jones were all up about 0.25%.

I've been following this fund almost daily for years and I've never seen it so out of step with the major indices. A few hundredths of a percent? Sure. But two whole percentage points? Never seen anything close to that.

WTF happened? Anyone?

[Dollar Slice]

Was there a year-end dividend payout, maybe?

[Tim1965]

Was there a year-end dividend payout, maybe?

Maybe. But shit, would that make it go down 2%?

[CowboyAndIndian]

Was there a year-end dividend payout, maybe?

Yes, there was a dividend on 12/19/16.

This happens every time there is a dividend payout.

Value of share before div = Value of share after div + dividend amount

[protostache]

Was there a year-end dividend payout, maybe?

Maybe. But shit, would that make it go down 2%?

Dividends accumulate through the period (6 months is common) and push NAV up, then when they are distributed NAV drops. Your account value should be the same, modulo ordinary market changes.

[Radagast]

^Correct. Schwab pays dividends once per year in December, so the fund will drop by an amount equal to the annual dividend.

[Dollar Slice]

I had the exact same reaction the first time I noticed this phenomenon, for the record :-)  Looks like the dividend was just over 2% according to CowboyandIndian's screenshot, so that makes sense for the price to drop about 2%. Basically they just turned 2% into cash and gave it to you. If you have reinvestments turned on you might not notice when it happens.

[Tim1965]

You're right. Dividend payout. I just checked.

But is that how dividends work, seriously? The fund tanks but we pay you the difference with a dividend?

[Tim1965]

Good thing this site exists otherwise I'd just walk around baffled all the time.

[Dollar Slice]

You're right. Dividend payout. I just checked.

But is that how dividends work, seriously? The fund tanks but we pay you the difference with a dividend?

Yes. Otherwise, you could buy it on the 18th, collect 2% dividend, and sell it on the 20th. And everyone would do that. And dividends would no longer work as a concept.

[MDM]

But is that how dividends work, seriously? The fund tanks but we pay you the, there  difference with a dividend?

Close, but the cause and effect are the opposite:
1) the fund pays a dividend
2) that decreases the amount of money held by the fund
3) therefore the value of the fund drops by exactly the amount of the dividend.

As already noted, if you reinvest the dividend you won't notice much change in your total value.

[rollsound]

i'm still struggling to understand mutual fund payouts. if the value of the fund drops by the amount of the dividend, then when exactly do you see the benefits of the dividend? shouldn't you be 2% ahead of where you started with a 2% yield, instead of back to square one? does this occur with ETFs as well?

[MDM]

i'm still struggling to understand mutual fund payouts. if the value of the fund drops by the amount of the dividend, then when exactly do you see the benefits of the dividend?

When the value of the fund increases back to what it was before the dividend.

shouldn't you be 2% ahead of where you started with a 2% yield, instead of back to square one? does this occur with ETFs as well?

Ah, good question.  This does apply to mutual funds, ETFs, and individual stocks (which, after all, are the building blocks of mutual funds and ETFs).

For a stock, yield is a combination of dividends paid and price increase.  If the price never increases - but also never decreases - the yield equals the dividend rate.

If the price continually decreases when each dividend is paid, the yield is zero because the dividends and price changes are equal and opposite.

See Dividend Facts You May Not Know | Investopedia for more.

[Interest Compound]

i'm still struggling to understand mutual fund payouts. if the value of the fund drops by the amount of the dividend, then when exactly do you see the benefits of the dividend? shouldn't you be 2% ahead of where you started with a 2% yield, instead of back to square one? does this occur with ETFs as well?

Now you see why everyone keeps repeating, "Dividends are mathematically equivalent to selling stock" in every dividend thread.

[rollsound]

i'm still struggling to understand mutual fund payouts. if the value of the fund drops by the amount of the dividend, then when exactly do you see the benefits of the dividend?

When the value of the fund increases back to what it was before the dividend.

ok yes that makes sense. is there some mechanism by which that happens right away? if not it seems like an index mutual fund would then be lagging below the index it was trying to track.

[MDM]

i'm still struggling to understand mutual fund payouts. if the value of the fund drops by the amount of the dividend, then when exactly do you see the benefits of the dividend?

When the value of the fund increases back to what it was before the dividend.

ok yes that makes sense. is there some mechanism by which that happens right away?

No, there isn't.  It is important that one understands why there is no such mechanism.  Otherwise one may be left with the mistaken impression that a dividend is "free money".

if not it seems like an index mutual fund would then be lagging below the index it was trying to track.

No, because the index is merely the sum of all the individual stocks and the price of each dividend-paying individual stock also drops by the amount of its dividend as described in the Investopedia article.

[Tim1965]

Thanks to one and all for the education. And here I thought dividends were bonus money, like 401k matching.

[Roots&Wings]

Vanguard always posts a list of the estimated distributions for each of their funds, as this can be a bit shocking depending on how the market has performed, and is important for estimated taxes if this is a taxable account. Maybe Schwab has something similar.

[Car Jack]

If you automatically reinvest, you'll see the price drop but your value stay the same.  If you have reinvestment shut off, you'll see the price drop, your value drop and your sweep fund (on the 23rd) show the dividend.

I have ETFs at Schwab (SCHB) and see big dividends in 2nd and 4th quarter and smaller ones in 1st and 3rd.