Cap gain distributions and divs from mutual funds during recessions and bear markets

[nico08]

Hello all. I am FIREd since 2014. The capital gain distributions from taxable mutual funds and dividends from my taxable mutual funds make up about one half of my annual expenses. This money does not get reinvested, instead it goes straight to my checking account.

As I understand, we are in a bear market. Also as I understand, we are in, or likely headed into, a recession. Do capital gain distributions and dividends from mutual funds reduce significantly during recessions and bear markets?

In 2020, I don't believe my capital gain distributions and dividends changed much, but that was a very short fall and rise. I was still working full time in 2008-2009, so my situation was very different, and I cannot tell if my capital gain distributions and dividends were much lower during that time.

Can i check the historical information for the mutual funds I have to get a better sense of what may happen with capital gain distributions and dividends on my funds?

I have some money set aside for my annual expenses, I'm just trying to get a sense of how much I can rely on the capital gains distributions and dividends from mutual funds during challenging times. The amount also impacts decision making for ACA purposes, I need a minimum amount of income to be eligible for the ACA.

 

[PaunchyPirate]

It’s very possible that stock mutual fund dividend distributions will be reduced during an extended downturn of the markets. That’s because the underlying companies in the fund might choose to cut their dividends in order to preserve cash. I don’t know of a reliable way to determine how much that cut might be.

Mutual Fund cap gains distributions occur when the fund has sold off some of its owned stock at a profit. Indexed mutual funds don’t usually cast off much of any cap gains. But managed funds often do. But Again, this will be hard to predict because you don’t have any way to predict what the managers of the active fund might sell off at a profit.

You may be able to determine an approximate % cut, like a 20% cut in dividends due to a down market, but I’m not sure where that number would come from.

Also, I’m not sure how bond fund distributions will react to a down market. It seems like they are rising right now as interest rates are rising.

 

[Alex The Great]

Any fund performance can be tracked here:
https://www.portfoliovisualizer.com/backtest-portfolio
For dividends, please make sure you set "Display income" as "Yes".
If your fund's history is too short you can choose similar fund established at least before 2008.

 

[athena53]

Its a crap shoot. If people sell out of mutual funds for less-volatile investments, the mutual funds have to sell securities to raise the cash. If they choose to sell long-term holdings that show a large gain but which they believe have little chance of further appreciation, you may get big capital gains even though it's a bear market.

I know it's a first world problem but capital gain distributions really make it hard for me to plan taxes (till the estimates come out). It's one of the reasons I'm moving more towards ETFs, individual stocks and mutual funds with low turnover.

 

[FANOFJESUS]

Some of them went in half in 08-09

 

[mrfeh]

Using the div yield of the S&P 500, it has been trending down for decades, but it's been relatively stable for the last 20 years:

https://www.multpl.com/s-p-500-dividend-yield

 

[scrabbler1]

What Athena53 wrote above reminded me of what happened in 2000 when the market slipped near the end of the year but actively managed funds still distributed large cap gains, creating a double-whammy of lower portfolio values and higher tax bills.

But the opposite happened in 2003 after the markets recovered from the 2001-2002 downturn. My actively managed stock fund zoomed back up while there were no cap gain distributions. This is because the fund had a large capital loss carryover in 2002, offsetting the entire gain it had in 2003. The remaining cap loss carryover was used to reduce, but not eliminate the cap gain distribution.

I don't remember what I discovered after the 2008 downturn (and I am not in the fund any more), but the fund didn't pay out another cap gain distribution until 2015.

I was able to find the amount of this cap loss carryover buried in the fund's annual report. In a pdf file, just do a search for the phrase. I forget if it was "carryover" or "carryforward".

 

[nico08]

Hi. This is all helpful information. I appreciate it. I suspect many of us, who are FIREd, but too young for a pension payment or social security, etc., are concerned about the possible amount that we will receive in the next couple of years from the capital gain distribution and dividends from taxable mutual funds.

I have most of my bond allocation in pretax accounts, I'm leaving those alone at this time.

 

[DawgMan]

I have some money set aside for my annual expenses, I'm just trying to get a sense of how much I can rely on the capital gains distributions and dividends from mutual funds during challenging times. The amount also impacts decision making for ACA purposes, I need a minimum amount of income to be eligible for the ACA.

Good question!

I am in year 1 of retirement and last years naturally occurring dividends would have covered about 60% of my planned spend. Anticipating a bad SORR scenario (and it happened), I set up a 10 year bond ladder to cover my planned expenses over 10 years with annual growth to play defense. My original plan was to turn off my dividend reinvestment, but I decided to keep it on since 1) I have my planned spend covered; and 2) reinvesting my dividends in a down market forces me to buy stocks on sale.

If/when I can get my arms around projected annual dividends I will ideally turn off the reinvestment button and ratchet down my bond ladder just keeping more in stocks, but that's my plan for this year.

 

[Alex The Great]

I have most of my bond allocation in pretax accounts, I'm leaving those alone at this time.

Actually my plan is to withdraw money from pretax account (in particular, 401K) using 55 rule as a second line of defense against dividends/distributions surprises in taxable accounts. The first line of defense is cash but it may not cover everything if we have a long and terrible downturn.

 

[nico08]

Hmmm. I will have to look further into using the 55 rule. I looked at it when I first FIREd but it was not a good idea for me at that time. Maybe it would be a good idea 8 years after retiring.

 

[nico08]

Oh wait. I am not old enough to qualify for the 55 rule. I had looked at the 72t election when I first retired.

 

[audreyh1]

Hello all. I am FIREd since 2014. The capital gain distributions from taxable mutual funds and dividends from my taxable mutual funds make up about one half of my annual expenses. This money does not get reinvested, instead it goes straight to my checking account.

As I understand, we are in a bear market. Also as I understand, we are in, or likely headed into, a recession. Do capital gain distributions and dividends from mutual funds reduce significantly during recessions and bear markets?

In 2020, I don't believe my capital gain distributions and dividends changed much, but that was a very short fall and rise. I was still working full time in 2008-2009, so my situation was very different, and I cannot tell if my capital gain distributions and dividends were much lower during that time.

Can i check the historical information for the mutual funds I have to get a better sense of what may happen with capital gain distributions and dividends on my funds?

I have some money set aside for my annual expenses, I'm just trying to get a sense of how much I can rely on the capital gains distributions and dividends from mutual funds during challenging times. The amount also impacts decision making for ACA purposes, I need a minimum amount of income to be eligible for the ACA.

Addressing the Cap Gains Distributions part:

My experience is that the first year of a bad bear market you will probably still get cap gains distributions from a mutual fund due to some forced selling in the fund of positions that still had gains. The next year, cap gains distributions can go to zero because they are offset by losses. And then very gradually move up again over the next few years.

Morningstar used to publish a metric that showed the unrealized capital gains in a mutual fund. This gave you an idea of the type of cap gain distribution exposure you had if you bought into a given fund. That metric would be negative if the fund still had realized losses that could be used to offset future gains. Maybe they still publish this metric in their tax efficiency analysis.

Dividends may shrink some during a bear market but aren’t nearly as variable as capital gains distributions.

 

[nico08]

Hello Audreyh1. I have access to Morningstar. I checked their reports but unfortunately it does not look like they show an unrealized capital gain metric in their reports anymore. Thank you for the idea though.

 

[MichaelB]

Hello Audreyh1. I have access to Morningstar. I checked their reports but unfortunately it does not look like they show an unrealized capital gain metric in their reports anymore. Thank you for the idea though.

I still see that number. It’s in the fees and expenses section of their fund analysis. Note - I access Morningstar through my public library, so that may be data only available to subscribers.

 

[TheWizard]

To the OP, some of us consider CGDs to be an undesirable side effect of owning managed funds vs owning most index funds.
It's certainly not free money.

Examine the Total Return of those funds you own compared to an S&P 500 or Total Market index fund.

I'm not advising an immediate transition to index funds in your taxable account, but perhaps a gradual transition in coming years...

 

[nico08]

Thank you TheWizard. The majority of my mutual funds, in taxable/tax free/ tax deferred accounts, are index mutual funds. I learned the value of index funds pretty early on, here at early-retirement.org But I still get capital gains distributions from these funds.

 

[mrfeh]

Thank you TheWizard. The majority of my mutual funds, in taxable/tax free/ tax deferred accounts, are index mutual funds. I learned the value of index funds pretty early on, here at early-retirement.org But I still get capital gains distributions from these funds.

I haven't actually gone back and looked at the numbers, but the cap gains (and dividends) thrown off by my taxable accounts, which are almost 100% index funds, have been very consistent.

 

[GTFan]

Thank you TheWizard. The majority of my mutual funds, in taxable/tax free/ tax deferred accounts, are index mutual funds. I learned the value of index funds pretty early on, here at early-retirement.org But I still get capital gains distributions from these funds.

That's odd, we own a variety of S&P 500 and Int'l Index funds and almost never see CGs. Vanguard and Fido.

I wish now that I hadn't bought into a couple of Fido active MFs long ago, because they throw off CGs all the time and moving them to indexes will be painful for long-term CGs. And as audrey said I fully expect to see CG distros for them this year even though both are down >20%.