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Capital gain / dividend question
Old 12-16-2015, 07:43 PM   #1
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Capital gain / dividend question

Whenever my mutual funds issue a capital gain or dividends, the NAV of the fund always decreases by the same amount as the dividend or capital gains.
What is the advantage to getting a dividend or capital gain?
Why do people have funds that throw off dividends, as it would seem that the taxes would be higher on the dividends, then if they just sold the same percent of shares that the dividend was, and they got a capital gains tax rate versus the dividend.

Where does the money for the dividends come from? Is it from excess cash that the company has, from profits, or something else?
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Old 12-16-2015, 08:01 PM   #2
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Originally Posted by Callitaday2022 View Post
Whenever my mutual funds issue a capital gain or dividends, the NAV of the fund always decreases by the same amount as the dividend or capital gains.
What is the advantage to getting a dividend or capital gain?
Why do people have funds that throw off dividends, as it would seem that the taxes would be higher on the dividends, then if they just sold the same percent of shares that the dividend was, and they got a capital gains tax rate versus the dividend.

Where does the money for the dividends come from? Is it from excess cash that the company has, from profits, or something else?
The way mutual fund are structured for tax purposes, they have to pass the capital gains and dividends thru or pay them themselves. Since someone has to pay the taxes on the dividends recieved and capital gains a fund makes by passing them thru the fund avoids paying the taxes on them if you don't like this there is the Berkshire Hathaway model where as a real corp BH pays taxes on capital gains etc.
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Old 12-16-2015, 08:05 PM   #3
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The tax rate on qualified dividends is the same as for LTCG so getting dividends does not have to be worse than selling shares. Some folks are in the 15% bracket where the tax rate for qualified dividends is 0 so for them this is not a problem.

.........but in general your concerns are valid....that is why tax efficient index funds are so precious. 2% or so of mostly qualified dividends and 0 CG is a nice feature to have so you have control of when the CGs are realized.
If you have actively managed funds you will often find unpleasant surprises in
large ST and LT capital gains.
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Old 12-16-2015, 08:37 PM   #4
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Originally Posted by Callitaday2022 View Post
Whenever my mutual funds issue a capital gain or dividends, the NAV of the fund always decreases by the same amount as the dividend or capital gains.
What is the advantage to getting a dividend or capital gain?
Why do people have funds that throw off dividends, as it would seem that the taxes would be higher on the dividends, then if they just sold the same percent of shares that the dividend was, and they got a capital gains tax rate versus the dividend.

Where does the money for the dividends come from? Is it from excess cash that the company has, from profits, or something else?
Dividends are cash companies pay to their shareholders and they come from their company profits. Mutual funds pass them through as dividend distributions.

Capital gains distributions, on the other hand, occur because funds have sold an investment for a gain, and gains have to be passed on the mutual fund shareholders annually.

The tax rate can be the same or different depending on many factors, including whether dividends are qualified, whether the capital gains distributions are short-term or long-term, and the tax bracket of the investor.
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Old 12-18-2015, 05:44 AM   #5
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individual company's dividends don't just come from profits since company's pay dividends even in years they lose money . they are really just distributions back of your investment capital decided on by the board of directors . .

mutual funds trade and as such make profits which have taxes due on those trades . so the profits are passed on to you but that doesn't mean you made money .

those profits may be from what the fund sold before you owned it . the remaining portfolio could be down so you are down but since it isn't sold yet any losses are not realized yet for you .
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Old 12-21-2015, 03:18 PM   #6
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The NAV of a fund adjusts down by the value of a dividend distribution in exactly the same way that a stock value is adjusted for a dividend payment. The adjusted price in both cases is known as the 'ex-dividend' price, and the day the price adjusts is the 'ex-dividend' date. To some degree, stock prices trade a bit higher when approaching ex-dividend since the stock holder of record on the proper day will be the one that gets the payment.
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