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need help understanding divs & cap gain stats
Old 05-05-2007, 10:06 PM   #1
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need help understanding divs & cap gain stats

I'm trying to get a bit more sophisticated with evaluating various funds, and I am stuck as to how to evaluate the reported information on dividends and capital gains.

For example, a comparison of Vanguard's total bond, international, and total market index funds from their various web pages:

Dividends
Bond Monthly around $0.04 (.48 for the year?)
International Annual $0.40, $0.29 last 2 years
Stock Quarterly $0.12 to $0.15 (.48 to .60 for the year?)

Capital Gains Dollars % of NAV (1st quarter of this year)
Bond -$0.06 -0.60%
International -$0.04 -0.22%
Stock -$0.72 -2.09%


In looking through other threads, I've seen numerous references to bond funds being better for tax-deferred holdings (because of high dividends) and the total stock market index as being very tax-efficient. But I don't see the difference in total dividends here, and the stock fund seems to have a lot more going on as far as capital gains. So I'm really confused!

What am I doing wrong here?
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Re: need help understanding divs & cap gain stats
Old 05-05-2007, 11:14 PM   #2
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Re: need help understanding divs & cap gain stats

The capital gains from the equity funds will be taxed at a lower rate (if held for more than a year, 15%) whereas the bond dividends (interest payments, really) will be taxed as standard income, which is probably higher than 15%.

Also, you list the dividend distributions as $/share, but the bond index is about $10/share and the total market index is at $36, so for the same investment amount, the bond fund is going to kick out more dividends. You really need to look at the dividend yield %.
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Re: need help understanding divs & cap gain stats
Old 05-06-2007, 09:25 AM   #3
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Re: need help understanding divs & cap gain stats

Expanding on soup's comments, you also should be aware that changes in NAV aren't taxed until you sell. If you hold for over a year, the gain would qualify for favorable LT cap gains tax treatment.

The distributions are also not all created the same. The distributions from bond funds will overwhelmingly be in the form of interest and ST cap gains. Those are taxed as ordinary income at your marginal tax rate. In contrast, some or all of the distributions from the equity funds are taxed as qualified dividends and LT cap gains.

Example:

Hypothetically, imagine I have a bond fund and an equity fund. They each pay out $1000. All of the bond fund's payout is ordinary income, while all of the equity payout is qualified dividends and LT cap gains. My marginal tax rate is about 38% all-in, while LT cap gains and qualified dividends get taxed at about 20% all in. So after tax, I get $620 from the bond fund and $800 from the equity fund.
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Re: need help understanding divs & cap gain stats
Old 05-06-2007, 09:59 AM   #4
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Re: need help understanding divs & cap gain stats

Thank you so much! This is very helpful.

I understand about the difference in how the distributions are taxed, that makes sense.

Regarding how much the funds throw off in distributions, you're saying the best number to look at is the yield? Ok, so I see that the bond fund is around 5.07%, whereas the total market is at 1.60%, so that makes me see that the bond fund is, in fact, throwing off more distributions. So far, so good.

Now when I look at the international fund, there's no value listed for the yield, even on the distributions detail page. Does that mean no distributions?
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Re: need help understanding divs & cap gain stats
Old 05-06-2007, 12:46 PM   #5
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Re: need help understanding divs & cap gain stats

The internatioonal index fund almost certainly throws off cash (yield), most likely 1.X%. For low-turnover equity index funds, most of the yield comes from the dividends the underlying stocks throw off. Cap gains distributions are usually small because of the efficient way the funds are run. Ideally, you would like your equity funds to yield only the dividends. That way any cap gains remain untaxed until you sell the shares
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Re: need help understanding divs & cap gain stats
Old 05-06-2007, 01:22 PM   #6
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Re: need help understanding divs & cap gain stats

Ok, this makes sense now! Thanks for your patience in explaining.

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