MF Fiscal Cliff CG Distributions?

[Tyro]

Just got an unexpectedly large (over five times the annual average, and over three times the previous largest, since we've owned it) CG distribution from one MF.

Is it possible or likely that some funds may be making larger than otherwise distributions in anticipation of the fiscal cliff, or is it more likely that the fund just had a really good year (or whatever) and this is just an aberration?
Not complaining -- jes' wondrin'...

Tyro

 

[marko]

I'd look at the companies that make up your MF. Several notable co's are pulling in their distributions to this year.

 

[braumeister]

Google "early dividends" for the explanation. Very popular right now as a tax-saving measure for shareholders.

 

[donheff]

Yup, the financial entertainment channels have been talking this up.

 

[MichaelB]

Lots of press for sure. Without knowing what the tax code will be, it seems kinda dumb to me, because the only "sure thing" will be higher taxes this year on the additional income..

 

[audreyh1]

I'd look at the companies that make up your MF. Several notable co's are pulling in their distributions to this year.

But those won't likely be paid out by mutual funds until next year. Most funds close their year books by end of Oct, and pay out distributions in Dec based on that.

Funds may have finally run out of carry-over losses from 2008, and unlike 2011, 2012 had some strong market gains. MFs tend to pay out higher cap gains dists after strong years.

 

[audreyh1]

I have been tracking the dividend and capital gains distributions paid out by my mutual funds in my taxable retirement fund since I retired in 1999. It's the largest component of my annual taxable income. And they vary widely, but there are some general patterns:

• The year after a market crash, MF distributions drop significantly. This is both capital gains and dividends. Interest rates are usually severely cut after an economic crisis - this means dividends/interest from bond funds drop big time. And mutual funds usually realize losses that they can offset against capital gains for a few years.
  
  
• In the subsequent years without a major crash or economic event, the distributions increase steadily year after year, sometimes quite a bit. The MFs have probably run out of losses to charge agains gains, AND interest rates usually increase generating higher dividends. I do notice that dividend increases tend to be more steady and gradual than capital gains distributions increases.

When the distributions seem to rise to an eye-popping level, that seems to be a warning flag that we're about ready for another crash? For example, the income really ramped up from 2005-2007, and the big leaps in 2006 & 2007 were almost all from capital gains distributions. At the time I fretted about tax efficiency and wondered if I needed to hold higher % equities. Later I realized it was in fact a warning shot across the bow!

Here is my history - %MF distributions paid out in a given year versus the portfolio value at the end of that year. [Realize that the end-of-year portfolio value varies widely from year-to-year as well.]

year %income from dists
2000 7.41%
2001 4.34%
2002 2.97%
2003 1.86%
2004 2.78%
2005 4.04%
2006 5.73%
2007 6.87%
2008 5.11%
2009 2.15%
2010 2.12%
2011 2.87%

I'm guesstimating this year will come in around 3.3%

Audrey

 

[Independent]

I think there's a difference between capital gains and dividends when we're talking "fiscal cliff".

The maximum rate on capital gains will rise from 15% to 20%, the top rate on corporate dividends will rise from 15% to 39.6%.

I can see corporate boards advancing dividends "just in case". But it's harder for me to imagine broadly held mutual fund directors advancing cap gains just because their participants may see a tax effect. If they do, I'd expect them to make a point of telling their shareholders why they took that action.

 

[LOL!]

Perhaps the issue is that these are actively-managed funds that are paying out these large distributions.

I checked the projected distributions for the index funds we own in our taxable accounts and there were no surprises. Dividends will be about the same in 2012 as they were in 2011 and there will be no capital gains distributions for these passively-managed index funds.

That's not to say there won't be surprises. Many years ago a Vanguard index fund of ours paid about about 10% of its value in a late December distribution.

 

[audreyh1]

I think there's a difference between capital gains and dividends when we're talking "fiscal cliff".

Right, any "advanced" stuff would be paid out as a qualified dividend distribution, not a caps gain distribution.

I can see corporate boards advancing dividends "just in case". But it's harder for me to imagine broadly held mutual fund directors advancing cap gains just because their participants may see a tax effect. If they do, I'd expect them to make a point of telling their shareholders why they took that action.

No, I don't think mutual fund directors can "advance" cap gains or dividends anyway, that's not how mutual fund accounting works. And they know that a lot of their funds are held in tax-deferred accounts, so the incentive is not necessarily there.

Now these mutual funds might receive some extra dividends this Dec, but I don't think they can pay them out to their shareholders (as dividends) until next year after they close their fiscal year. Mutual funds fiscal year end is usually Sept 30 or Oct 31, and they pay the resulting distributions in Nov or Dec of the same year.

 

[Animorph]

Yep, MF's just pass along all dividends, minus expenses. And I would expect the timing of any special dividends would be too late to show up this year for many MF's.

MF's do have control over capital gains, to the same extent anyone does. I haven't seen any of my funds saying they want to distribute gains for tax purposes. Heck, in my case they'd just be handing me cash and hoping I'd reinvest it. Seems like they'd prefer to hold on to everything they can.

 

[Bestwifeever]

Yep, MF's just pass along all dividends, minus expenses. And I would expect the timing of any special dividends would be too late to show up this year for many MF's.

MF's do have control over capital gains, to the same extent anyone does. I haven't seen any of my funds saying they want to distribute gains for tax purposes. Heck, in my case they'd just be handing me cash and hoping I'd reinvest it. Seems like they'd prefer to hold on to everything they can.

I have been hearing for several weeks that some corps will pay more out this December anticipating higher taxes in 2013. I just read a story on Fox Business that Expedia will pay a "special dividend" in December and that the Washington Post will accelerate all its 2013 dividends to pay them this December. Sorry I can't easily cite this story from my smart phone but a google search brings it up.

Both companies made the announcement on 12/7 so I guess there is still plenty of time to get them paid by individual companies.

 

[audreyh1]

Both companies made the announcement on 12/7 so I guess there is still plenty of time to get them paid by individual companies.

Yes, if you own the stock. Some companies have accelerated their dividend payout - CSCO is paying their Jan 2013 in Dec 2012, and Oracle is paying 3 of next year's scheduled dividend payouts this month instead!

 

[Animorph]

My Royce funds have already paid out 2012 distributions, so probably no special dividends there unless some companies planned way ahead.

 

[samclem]

Vanguard has provided (as of 07 Dec 2012) an estimate for the expected 2012 dividend distributions for their MFs and ETFs and also updated their CG projections.

At this link.

I think this is the last piece I need to allow me to compute my projected 2012 income, make a few adjustments (charitable giving, etc) and then sell as many shares as I can of appreciated shares while staying under the next income level (and higher CG tax that awaits there).

It's a pity Americans have to compute their taxes at least twice (before and after the end of the year) in order to avoid getting skewered by all the abrupt income limits/phase-outs, etc for all the inter-connected provisions of the tax code.

 

[audreyh1]

Interesting - I just received several "extra" dividend distributions from several funds yesterday, well after these funds had already paid out their scheduled annual distributions.

So, I suppose these funds are indeed trying to pay out late "extra" qualified stock dividends received this year? Three different fund families so far.

I looked at distribution histories - and this hasn't happened in prior years - at least not the last couple. So I suspect this is a one-off event. Surprise!

 

[rbmrtn]

Could be, maybe check the funds website for info. You may get div in 2013 for 2012. This was on the FPA website

FPA Funds Delays '12 Dividend Distributions Due To Fiscal Cliff - Investors.com

 

[audreyh1]

My Royce funds have already paid out 2012 distributions, so probably no special dividends there unless some companies planned way ahead.

I thought I was done too.............

 

[audreyh1]

Could be, maybe check the funds website for info. You may get div in 2013 for 2012. This was on the FPA website

FPA Funds Delays '12 Dividend Distributions Due To Fiscal Cliff - Investors.com

I was expecting to get some of this in 2013.

Interesting that our funds didn't delay their normal distributions. They just paid out "extra" dividend distributions later. These extra ones were never announced.

 

[Tyro]

In addition to my OP, I just received a sizeable CG distribution from a tax-free (muni bond) fund, which I was not expecting at all because I just bought the fund in Aug., and rates haven't dipped all that much since then. We tried to plan our taxes pretty close this year, but with these unexpected distributions, we may get kicked into a higher bracket.

My question now is, are these CG tax-free as well, or is it just the dividends?

Tyro

 

[audreyh1]

In addition to my OP, I just received a sizeable CG distribution from a tax-free (muni bond) fund, which I was not expecting at all because I just bought the fund in Aug., and rates haven't dipped all that much since then. We tried to plan our taxes pretty close this year, but with these unexpected distributions, we may get kicked into a higher bracket.

My question now is, are these CG tax-free as well, or is it just the dividends?

Tyro

Just the dividends are tax-free from muni bond funds, not the capital gains. I also received capital gains distributions from my bond funds (including muni bonds). Bond funds do tend to pay out some capital gains when they have a year of strong appreciation as they did this year. Muni bonds did as well.

Distributions are almost impossible to predict/anticipate from year to year. Capital gains distributions from bond funds tend to be rare. The only thing I feel I can predict is that next year's distributions might be slightly smaller than this years, especially if stocks don't do well in 2013.

 

[scrabbler1]

Most of my bond funds paid out cap gains distributions this year, including one which had not paid out any since 2006 (and the time before that in 1999). How much they paid out often depended on the length of the bond (i.e. short, intermediate, long), with the long-term bond funds more likely to pay them out and pay out larger ones.

You also have to be aware of the split between long-term cap gains distributions and short-term cap gains distributions, the latter of which is reported as ordinary dividend income, not on Federal Schedule D (if applicable). Back in 2010 I had a bond fund pay out a short-term cap gains distribution which was 3% of the NAV, a huge percentage, and it was fully taxable as ordinary income.

 

[Tyro]

You also have to be aware of the split between long-term cap gains distributions and short-term cap gains distributions, the latter of which is reported as ordinary dividend income, not on Federal Schedule D (if applicable).

Yes, that's differentiated on the statement, and again in the year-end forms, as it always has been with equity funds.

 

[rbmrtn]

In addition to my OP, I just received a sizeable CG distribution from a tax-free (muni bond) fund, which I was not expecting at all because I just bought the fund in Aug., and rates haven't dipped all that much since then. We tried to plan our taxes pretty close this year, but with these unexpected distributions, we may get kicked into a higher bracket.

My question now is, are these CG tax-free as well, or is it just the dividends?

Tyro

The funds CG distributions are usually made annually, so it doesn't matter when you buy it even up to the X-dividend date. Some wait buying funds late in the year to avoid unwanted distributions.

Just the dividends are TF, CG are taxable