Recently Fidelity Low Price Stock paid dividends. The price dropped dramatically per share effectively giving me the same total $ amount as I had before the dividends. Why do they pay dividends and have the price drop at the same time?
2006-09-12 08:36:57 · 4 answers · asked by jetttttt2000 1 in Business & Finance ➔ Investing
The fund (or company) only has so much money. So if they pay out money in the form of a dividend, then the remaining value of the fund or stock is less, thus the adjustment (and hence the term exdividend).
Hope that helps!
2006-09-12 08:56:32 · answer #1 · answered by Yada Yada Yada 7 · 1⤊ 0⤋
As to why they pay dividend. They are required by law to pay out their capital gains and income. The law was put in place so that you would have to pay taxes on the dividends. One good thing is that they are taxed at a lower rate than earned income.
The price drops because the dividend is no longer part of the assets of the fund. Open ended mutual funds always trade at net asset value.
If you are not happy about receiving such a large dividend that you will then have to pay taxes on, consider purchasing index funds instead. They pay much smaller dividend generally speaking because they do not sell their holding. They are basically for the most part an unmanaged holding of securities.
2006-09-12 09:34:35 · answer #2 · answered by Anonymous · 0⤊ 0⤋
Actually, if you watch carefully, the same thing happens with common stock, it is just not so dramatic. On the "ex-dividend date", the cutoff date for holding the stock and recieving the dividend, the price of the stock drops by the amount of the dividend.
Mutual funds are more dramatic (FLPSX scared the **** out of me, too, because the new shares weren't posted to my account until Monday, so I had an apparent loss on Friday.) Mutual funds usually distribute dividends their holdings have earned, long-term capital gains on holdings they have sold since the last dividend, and ditto for short-term gains. the price drops, and you now have more shares. If you are holding the shares in a taxable account, however, you now have to pay taxes on each category of "gain", even though you may not have any more value in the account.
2006-09-12 08:43:26 · answer #3 · answered by Dave 4 · 1⤊ 0⤋
They are passing the dividends they received along to the owners of the company (shareholders). That's part of the deal.
Look on the bright side....once you pay the tax on that distribution, you'll never pay tax on that money again (just keep good tax records and adjust your tax basis up).
2006-09-12 08:41:57 · answer #4 · answered by derek 4 · 0⤊ 0⤋