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Is the annual total gain of a stock assume dividends re-invested?
Old 08-13-2013, 01:42 AM   #1
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Is the annual total gain of a stock assume dividends re-invested?

When a firm like Vanguard shows a Dividend Fund earning say 5% since inception. Does this figure represent the dividends it throws off as being reinvested along with capital appreciation, or just the dividend plus growth irregardless of the dividend being reinvested? (in other words the dividend is withdrawn)
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Old 08-13-2013, 02:58 AM   #2
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Almost all funds assume that dividends and capital gain distributions are reinvested.
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Old 08-13-2013, 03:04 AM   #3
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I just looked at Vanguard site, and it shows the returns of all funds as "averages".

Are those really arithmetic means, instead of annualized returns or geometric means?
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Old 08-13-2013, 06:31 AM   #4
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I believe that they are internal rates of return (IRRs) assuming you invested $1 at the beginning of the period, reinvested all distributions and sold at the end of the period.

So if you compounded the investment cash flows for the period at the rate of return you would get the terminal value.
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Old 08-13-2013, 03:30 PM   #5
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Then is there a rate stated anywhere that shows just the capital appreciation along with dividend without dividends re-invested? If so, what is that referred to?
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Old 08-13-2013, 03:43 PM   #6
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Originally Posted by modhatter View Post
Then is there a rate stated anywhere that shows just the capital appreciation along with dividend without dividends re-invested? If so, what is that referred to?
I'm no expert, but I thought that was "total return".
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Old 08-13-2013, 03:45 PM   #7
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Not that comes to mind. You could download the data and compute it but that would be too much w*rk.
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Old 08-13-2013, 03:49 PM   #8
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I'm no expert, but I thought that was "total return".
No, total returns are computed assuming dividends and capital gain distributions are reinvested.

Quote:
Important fund performance information
Total returns
Short-term total return information is provided only as a service. Historical performance, particularly short-term performance, is no guarantee of future returns. Share price, yield, and return on an actual investment will fluctuate, and you may have a gain or loss when you sell your shares. Average annual returns include changes in share price and reinvestment of dividends and capital gains.
(emphasis added)
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Old 08-13-2013, 04:05 PM   #9
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Returns as reported in the mass media are often just the price performance. Total return would include dividends reinvested. There are some sites that allow you to track both, and it's helpful to see the impact that dividends have had historically and over time. I like to use this site for ETFs and individual stocks:

YCharts - Stock Charts, Stock Ratings & Economic Indicators

Plug in the ticker symbol and then poke around the "fundamentals" tab to see the difference between the different measures. You can plot "Price" vs "Total Return Price" to see the difference between the two.
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Old 08-13-2013, 06:04 PM   #10
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Ycharts is a very nice site for stocks and ETFs. It does not have MFs, however.

As Truenorth noted, many sites only show the price history of an equity, which can really understate its return due to omission of dividend, and also realized cap gains for MFs.

As a MF manager buys/sells his stock holdings through a year, he has to declare to his shareholders the dividends, short-term capital gains, and long-term capital gains that he receives in the year, net of the losses of course. These declarations are for tax purposes, and the share holder may or may not want to reinvest them.

As the stocks that he does not trade also appreciate in value, this results in the MF share price going up in value due to unrealized gains.

The return numbers that MFs usually quote are the total returns, assuming that all distributions are reinvested.

In the retirement distribution phase of life, many people plan to live off the dividend and cap gain distributions, and expect or hope that the price increase of the MF share carries enough unrealized cap gains to keep up with inflation. I guess that was the reason for the question by the OP.

Now, suppose that a MF has cap losses instead of gains due to a bad year. Note that when the market drops hard, some shareholders will bail out, and the manager has to sell something to get cash to meet redemption. And that means that he usually sells low against his own wish, and may suffer some loss. The law does not allow passing on that cap loss. The fund can then keep that loss on its book to cancel out future gains.

For more info on tax and accounting issues with MFs, see: Mutual Funds and Tax Benefits - WSJ.com.
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Old 08-13-2013, 07:06 PM   #11
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Thanks for the link TrueNorth418. I will definitely check it out, and yes NW-Bound you were right in your assumptions as to my original post.

Index funds would not normally have capital gains unless you sell a portion of them, but a funds like Wellesley, Wellington or Windsor would or any managed fund.

So, yes, since I am in the draw down phase of my life now, I'm trying to look at what the actual numbers might look like without dividends re-invested, in hopes that the capital appreciation could sustain the inflation aspect.

I'm not sure how that will compute for the managed funds as stated above, when they sell stocks or bonds and pick up new ones. I know there will be taxes to pay if it resulted in a gain. How much of a tax I don't know as I have never owned a managed fund before. So subtracting dividends not -re-invested and taxes to be paid each year from a managed fund is a bit of an unknown to me. It would be so much simpler if I had a REALLY BIG PORTFOLIO, and could just manage on the dividends alone. Certainly give me less of a headache.

I don't know how realistic spending down the capital gains would prove and relying on unrealized capital gains in a fund would work out. In order for any growth, I would think you need to leave some skin in the game, whether through re-balancing or re-investing gains in a managed fund.

Stock prices go up, but not indefinitely. They also revert back to the mean, so it appears that in order to keep up with inflation while drawing down, you still need to re-invest one way or the other. If you were lucky enough to be involved in a long bull market, you might not need to do this as much, but at least you should be re-balancing.

Please feel free to correct my mistakes.
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Old 08-13-2013, 08:05 PM   #12
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Yes, it would be nice if I also had a big stash (or learn to live on less!), so that I can just live off the dividend. Right now, the S&P has a dividend yield of 2%, Wellington of 2.2%, and Wellesley of 2.5%. A bit short of the 3.5% WR, which is already a bit low compared to historical numbers. The last 13 years was a heck of a time, with low returns on both stocks and bonds.

About rebalancing, the idea of buying a balanced fund like Wellesley or Wellington is that you pay the 0.25% annual expense (0.17% for Admiral shares) so that they do it all for you. But when the dividend yield is low, and you cannot blame them for it as they cannot print money, then you will have to sell some shares if you want to get a higher WR, say 3 or 3.5%.

As we cannot predict the future, let's look at the past to see how a fund like Wellington would have worked for you.

From Morningstar, I get the following performance data for total returns.

If you invested $10K on 7/31/2008, you would have $14.87K on 7/31/2013.
If you invested $10K on 7/31/2003, you would have $22.95K on 7/31/2013.

That worked out to 8.66% annualized over the last 10 years, or 8.26% over the last 5 years. That appears to be high enough that you can sell a bit of shares to supplement the meager dividend yield, and still have some leftovers for inflation.

Let's check further, by looking at the share price, or what you get if you do not reinvest any distribution.

Share prices:
on 7/31/2003 $26.63
on 7/31/2008 $29.91
on 7/31/2013 $37.62

That works out to a price gain of 25.8% in the last 5 years, or 41.3% in the last 10 years. I then looked up the inflation in 5 years as 6.71%, and 27.1% in 10 years. Note the low number of 6.71%, which was due to a couple of years of deflation.

So, the price gain is in excess of inflation. Using the price gain computed above, if you spent the distribution instead of reinvesting it, your $10K in 2003 would be worth $14.13K now. However, the inflation rate of 27.1% means that you only need $12.7K to match inflation. That frees up $1.4K for spending. That's 14% in 10 years or roughly an additional 1.4% per year that can be drawn on top of the meager dividend.

In short it appears that a 3.5%WR was sustainable even over a bad period like we have had.
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Old 08-13-2013, 10:45 PM   #13
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Originally Posted by modhatter View Post
Stock prices go up, but not indefinitely. They also revert back to the mean, so it appears that in order to keep up with inflation while drawing down, you still need to re-invest one way or the other. If you were lucky enough to be involved in a long bull market, you might not need to do this as much, but at least you should be re-balancing.
Stock prices can go up indefinitely. They follow a company's earnings and dividends. Reversion to the mean does not mean shares revert back to their original price. Instead, it reverts back to an average price to earnings (or yearly growth) level after market sentiment has gone bonkers one way or the other. There is no need to buy additional shares in order to keep up with inflation unless the company is giving away all their profits as dividends or one time charges and aren't growing earnings.
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Old 08-14-2013, 10:53 AM   #14
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I forgot to add that I answered my own earlier question, as quoted below.

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I just looked at Vanguard site, and it shows the returns of all funds as "averages".

Are those really arithmetic means, instead of annualized returns or geometric means?
In looking up the investment growth from Morningstar, I also computed the annualized returns, as shown below.

Quote:
Originally Posted by NW-Bound View Post
...
From Morningstar, I get the following performance data for total returns.

If you invested $10K on 7/31/2008, you would have $14.87K on 7/31/2013.
If you invested $10K on 7/31/2003, you would have $22.95K on 7/31/2013.

That worked out to 8.66% annualized over the last 10 years, or 8.26% over the last 5 years...
The numbers of 8.66% and 8.26% agree exactly with what Vanguard shows as "average returns" on its Web site. The word "average" bothered me a bit, because it usually implies arithmetic average, but the posted numbers turn out to be truly annualized.

For people who are not familiar with this, please let me explain the difference between arithmetic average and geometric average, with the later used to compute annualized return.

Suppose one puts $1 in an MF and at the end of Year 1, he has $1.50. We call that a 50% return. Then, the MF subsequently tanks, and his $1.50 now shrinks to $0.75 at the end of Year 2. We call that a -50% return.

If we average the two single-year returns, we will say the average return is 0%. But we lose money at the end, so that's wrong.

The return should be annualized by recognizing that over 2 years we have a net loss of -25% ($1 down to $0.75). The proper way then is to say that on the average, we have a return of -13.4% each year, or a $1 shrinks to $0.866 on the average each year. It is so that when compounded, 0.866 * 0.866 = 0.75.
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