Trying to understand dividend distributions better

[bigote2032]

Hello all -

I always wonder why every quarter I do get very different amount of dividends.  Say if I have an index fund with a value of 500K and the yield is 2%:

- I assume I will get 10K of dividend a year
- If that is the case, would I get 2K per quarter? If not, how does it work?


Asking because I have several index funds (SP500, small cap, etc) that are giving me very different amount of dividends per quarter so it is hard to estimate what I am expecting to get the next quarter.

Thaks for your help

[secondcor521]

The short version is that mutual funds pool the money they receive from investors and buy individual stocks (or bonds, but it sounds like you're talking about stock mutual funds).  These stocks pay dividends that the mutual fund collects and then distributes to investors every quarter.  The dividends are decided by the board of directors of each company.  Companies try to keep their dividends the same (or sometimes increasing a bit), but depending on economic conditions and other external factors they can raise or lower them, or even declare special dividends sometimes.

The yield you're referring to is just the mutual funds' best estimate for what the dividends will be in aggregate and is pretty typical for a S&P500 index fund (I think it's about 1.8% now).  So yes, you should get about $10K per year.

Typically distributions by mutual funds tend to be higher in the last quarter of the year.  I'm not sure why this is exactly, but I guess it might have something to do with capital gain and capital loss harvesting.  (If the fund you own has bought or sold stocks during the year, any capital gains or losses are passed along to investors as well.  This is also true for interest earned in the case of bonds.)

[MustacheAndaHalf]

An important intermediate step: a mutual fund has expenses, but you never see the expense ratio being withdrawn or shown.  When a mutual fund receives dividends, before passing them along to you, they extract the fund's expense ratio for that quarter.  So you receive quarterly dividends minus the fund's quarterly expense ratio.

[YoungInvestor]

An important intermediate step: a mutual fund has expenses, but you never see the expense ratio being withdrawn or shown.  When a mutual fund receives dividends, before passing them along to you, they extract the fund's expense ratio for that quarter.  So you receive quarterly dividends minus the fund's quarterly expense ratio.

If that is the case, wouldn't you be saving the expense ratio of you sold before the ex-div date and bought right afterwards?

I'm pretty sure the ER is taking on a daily basis, no?

[Rob_bob]

In addition not all the stocks in a fund will pay dividends in the same month, some will pay quarterly some semi annually and others annually.

[$eneca$h]

Dividend yield is always annualized and backward-looking. Whatever 2% you're seeing is likely the total dividends per share paid out over the last 12 months divided by the current share price.

Dividends can and do get cut, in which case the trailing-12-month yield will be overstated. See financial companies during 2008 for examples.

[bigote2032]

Thanks all for the info!

[MustacheAndaHalf]

An important intermediate step: a mutual fund has expenses, but you never see the expense ratio being withdrawn or shown.  When a mutual fund receives dividends, before passing them along to you, they extract the fund's expense ratio for that quarter.  So you receive quarterly dividends minus the fund's quarterly expense ratio.

If that is the case, wouldn't you be saving the expense ratio of you sold before the ex-div date and bought right afterwards?

I'm pretty sure the ER is taking on a daily basis, no?

Vanguard Total Stock Market has 1.7% in annual dividends and a 0.04% annual expense ratio.  So if you had $10,000 invested, you would be giving up $170 because you don't like paying $4.

[$eneca$h]

An important intermediate step: a mutual fund has expenses, but you never see the expense ratio being withdrawn or shown.  When a mutual fund receives dividends, before passing them along to you, they extract the fund's expense ratio for that quarter.  So you receive quarterly dividends minus the fund's quarterly expense ratio.

Wrong. Expense ratio accrues on a daily basis, not quarterly, and it's withdrawn from the fund's NAV. Dividends of the underlying investments are just one driver of the fund's change in NAV. In fact, dividends of the underlyings are at best irrelevant (because the price of the underlying goes down by the amount of the dividend ex-div) and at worst undesirable (because dividends force you to realize gains and pay taxes on them, whereas capital gains and their associated taxes can be deferred until the investment is sold).

[ice_beard]

In addition not all the stocks in a fund will pay dividends in the same month, some will pay quarterly some semi annually and others annually.

I'm glad this thread came up because I've been having a difficult time understanding my dividends or lack of dividends. 
I have some VFORX and it appears it has an annual dividend.  I'm wondering if there are advantages to having funds that pay out quarterly vs annually?  It seems like a lot can happen in the course of a year.  You could easily have two good quarters which would positively effect the value of the dividend and then a terrible rest of the year and the end of year dividend is less?  I have no idea if this is possible as I don't think I fully understand how they are calculated. 

Psychologically, I like seeing the payments more often but is there any financial advantage to paying out more often? 

[MustacheAndaHalf]

I stand corrected - expenses are paid daily rather than quarterly.

[DaveSch]

I've always considered dividends and capital gains distributions merely as taxable events. The amount of the distributions is subtracted from the NAV of the fund (no free money). In my case, I take all distributions in cash and then I decide to invest or if needed use the money to may my living expenses. Mutual funds are required to pass through all earned dividends and capital gains distributions to the remaining shareholders of the fund. Those are taxed, if the recipient holds the fund in a taxable account.

Some mutual funds are very steady on these quarterly or annual payouts, and some not so much. Capital gains vary greatly as they depend on the gain or loss the fund had from selling the securities.

Dave

[NorCal]

Keep in mind some companies in the index will pay dividends quarterly, some annual, and some semi-annual.  This is part of why they vary quarter to quarter, and Q4 is typically the largest.

I believe that in general, the larger the company, the more frequent the payment.  So a smaller REIT might pay annual, while GE would pay quarterly.  Based on my holdings, it also seems foreign companies are more likely to pay annually, although that is anecdotal.

[Vyse]

From a taxable point of view, does it matter? If a fund pays out $10 every month, and a different fund pays out $120 once a year, but they both pay out a total of $120, does the IRS care?

Relatedly, if they're auto-reinvested, you still have to pay taxes right? But all that will be (hopefully) made simple by a single tax document that your fund manager (vanguard, fidelity etc.) provides?

[marty998]

I stand corrected - expenses are paid daily rather than quarterly.

No they are accrued daily and reflected in the unit price. They are usually paid monthly or quarterly to the fund manager - because the admin involved in doing the invoicing and cash transfers will likely increase your MER to an exorbitant amount.