Mutual funds and dividend distribution question

[retire48in2018]

I understand the following -
When a mutual fund pays a dividend, the value of each share is reduced proportionately. For example, if you were to begin with a net asset value of $20 per share and the mutual fund pays a dividend of $1 per share, the net asset value would be reduced to $19.

However, at another level - I don't get it. When a company pays out a dividend, the company share price does not drop exactly in line with that payout. In fact, it appears that stock price goes up and and then back down on the ex-dividend date, so mostly a neutral change.

I don't understand why I don't get more money while holding stocks through mutual funds through dividend payouts. In the open market, this decline in price matching dividend does not happen - yet it does in the mutual fund price.

Who is really getting this premium?

 

[pb4uski]

Think if it this way.... let's say you have a mutual fund that owns $1,000m..... $950m of stocks and $50m of cash..... and it has 100m shares outstanding so the NAV of each share is $10. ($1,000m/100m shares).

The fund pays a dividend of 50c/share or $50m (50c * 100m shares) and no dividends are reinvested.

After the dividend, the fund has $950m (all stock) and there are still 100m shares outstanding, so the NAV is $9.50/share.... the $10 per share pre-dividend less the 50c per share of dividend.

Now in reality, that $950m of stock will change in value during the day and that may be the noise that you are interpreting as premium.

So for example, that $950m portfolio increased to $955m during the day then the share value would be $9.55 and if it declined to $945 during the day then the share value would be $9.45.... so with this added complication the change in the share price from the $10 is the dividends paid per share and the change in value per share.

 

[RunningBum]

Please give an example of a stock you think where the price is unaffected by the dividend. The price on either the open or close (not sure which offhand) of the ex-dividend date will be adjusted by the dividend amount. It could rise during the day, making it seem unaffected, but it still is. A mutual fund does not have that intra day trading to muddy the waters on the dividend adjustment.

 

[MRG]

Please give an example of a stock you think where the price is unaffected by the dividend. The price on either the open or close (not sure which offhand) of the ex-dividend date will be adjusted by the dividend amount. It could rise during the day, making it seem unaffected, but it still is. A mutual fund does not have that intra day trading to muddy the waters on the dividend adjustment.

+1

IIRC the open price is adjusted by the dividend amount and then trading starts.

 

[gauss]

Please give an example of a stock you think where the price is unaffected by the dividend. The price on either the open or close (not sure which offhand) of the ex-dividend date will be adjusted by the dividend amount. It could rise during the day, making it seem unaffected, but it still is. A mutual fund does not have that intra day trading to muddy the waters on the dividend adjustment.

But doesn't the mutual fund also have day to day market based changes (due to the underlying assets) in addition to the dividend component of the price change?

-gauss

 

[pb4uski]

But doesn't the mutual fund also have day to day market based changes (due to the underlying assets) in addition to the dividend component of the price change?

-gauss

Yes, see post #2

 

[gauss]

^ Good. Thanks.