Why do mutual funds loose value when they have a dividend distribution?

Question

What is the benefit of the dividend if -- after the share price dropped post distribution - my overall value is still the same as before or even less? See FBALX on 9-8-06

Answer 1

Because the value of a share in a mutual fund is based on the value of all the assets(stocks, bonds, cash, etc) that the fund holds, when a fund pays out dividends (cash) the total assets held by the fund fall and thus the share price will fall by the same value. The benefit (or detriment depending on your intentions) to you is you have converted some of the value in your share to cash which can be reinvested, invested elsewhere, or spent. The downside is you generaly owe taxes on the dividend.

Answer 2

You ask the right question - why pay a dividend if it just comes out of the share price? The answer is that they're required by law to distribute a certain percentage of the dividends, interest and capital gains realized in the year. Tax law requires this because the mutual fund itself doesn't pay any taxes. If realized gains were allowed to accumulate in the fund without being taxed it would be a huge tax dodge for the fund shareholders.

Answer 3

When a distribution is made, the NAV (net asset value, or share price) falls. The shareowner gets the distribution either in cash or in additional shares. At that point, there is no change in your total wealth, as you either have slightly more shares worth slightly less per share, or you have same shares worth slightly less plus some cash. Normally, it's no big deal.

The possible problem is, if you have the fund in a taxable account (NOT an IRA), you will owe income tax on the distribution regardless of whether you took cash or additional shares. Most advisers recommend avoiding purchasing shares in December, when most distributions are made, because in effect you get your money handed back to you, owing income tax on it. Wait until after a distribution to buy shares.

Answer 4

Because the Dividend is paid to the shareholders. Example: Share Price before dividend $10......$1 dividend paid to shareholders......Share Price after dividend $9

Very simple.

$1 Dividend is taxable income. You receive 1099.

Put your long-term money in:

Fixed Index Annuities ------Where your account value does NOT Decline in Value. -----Where the Credited Interest to your account does NOT Decline in Value. -------Where the interest you earn each year is based ONLY on the Upside of a Stock Index (You would accept a Cap on the Upside of say 8% in exchange for not having your account decline in value, wouldn't you???? I know I would!!!!) The Cap varies by company & annuity and is usually guaranteed for 1 year. Other crediting methods are also available. All credited interest is Tax Deferred.

To Learn more Visit: http://www.jdsannuities.com/index_annuities

Answer 5

in case you have chosen to have dividends re-invested, you finally end up with extra shares. because of the fact the proportion cost of the Mutual Fund climbs, which will help your investment strengthen quicker. in case you have regarded at any chart or records on the Mutual money you very own, the return figures are continuously "entire return" it is arrived at by figuring the re-investment of interest and dividends. by the years, the adaptation would be dramatic.

Answer 6

They don't lose value.

They are just passing the dividends along to the shareholders. Did you want them to keep them?