Will mutual funds pay yearly dividends if stocks keep dropping?

Question

If not, there is no point to continue to invest and throw my down a black hole.

Answer 1

Interestingly, mutual funds may pay a year end dividend even though you have lost money in the mutual fund. This is because of the tax laws. They must pay out their realized capital gains annually. And you will have to pay taxes on that dividend even though you have lost money. Isn't the government wonderful? Bend over and grab your ankles.

Answer 2

A mutual fund pays dividends based on the dividends paid by the stocks the fund owns. Dividends are paid by companies out of their earnings. So as long as companies have earnings, dividends will be paid to the fund and the fund will pay them to you. The stock price doesn't have any impact on dividends (except, of course, that the yield calculation will change - the lower the stock price the higher the yield).

Mutual funds also pay out short and long term capital gains at the end of the year. These are affected by the price of the underlying stocks. If, for example, mutual fund shareholders liquidate their shares (because they see prices falling), and the fund lacks the cash to pay them, then the fund must sell stock to raise the cash. If the fund bought the stock earlier and has a capital gain, then that gain will be distributed to the mutual fund's shareholders (who will then pay tax on it) at the end of the year. If the fund doesn't have a gain the stock it sells, then the fund (and its shareholders) take the loss as expressed in the declining share price of the fund.

Answer 3

You can invest in mutual funds that give you a continuous rate of return/dividend-- such as a mutual fund based on annuities or similar investment vehicles.

Either way, long term- a diversified investment strategy will whether gains and losses long term... Case in point: over the past 80 years-- the whole stock market averages have been over 12% annualized year over year... while savings and government bonds (ie guaranteed money) have always been closer to 5%.

If you are queasy of losing money, then invest in things that are guaranteed such as the government and Savings/CDs... Personally I think that you will never get the returns that you need but if thats all you want (security) than go for that and sleep well.

Just a thought.

Answer 4

We have two seperate processes going on here.

The price of stocks (and hence the NAV of your mutual fund) is based merely on the supply and demand of these stocks. This is determined by expectations. As Professor Malkiel says, "Stocks are bought on expectations, not on facts." Yes, if a company does well, more investors demand this stock, which drives up its price. And vise versa if the company does poor. However, this is based on investor's interpretations. Sometimes the price will go up or down based merely on fear or greed, or will be exagerated. People's demand for a stock is not always logical or objective.

The dividend that a stock pays depends on the board of directors for that company. If the board feels the company has posted stable earnings for a few years and it does not need the extra cash to reinvest in the company, then the board of directors will declare that dividends are paid out that year. This is completely independend of the current market price of the stock. (The catch is that the board of directors is not legally obligated to pay dividends. It is up to their discretion. This is the key difference between stocks and bonds. With bonds, the income is known and contractual. With stocks, the income is uknown.)

One factor (the price) is external, coming from the opinions of millions of investors. The second factor (dividends) is internal, coming from within the company itself. They are two seperate processes.

Almost all mutual funds hold at least one stock that pays dividends or will pay dividends at some point this year. So, yes, your mutual fund will distribute dividends at some point. It may hold onto them and do this at the end of the year. However, it will almost certainly distribute dividends, regardless of what happened to the fund's NAV. Trust me. Mutual funds were paying dividends during the entire 2000 - 2003 market crash. (This wasn't that long ago. It's amazing how the general public forgets about market downturns.)

To get a better understanding of stocks and mutual funds, read section 2 of my free downloadable book at http://www.invest-for-retirement.com

Answer 5

Dividends are a function of two things;

Dividends declared by the stock holdings.
Dividends paid because a position was sold.

Please pick up a book on Mutual Funds. The "Dummy" series has (among others) a good one. You should never be invested in anything you don't understand.

Asking strangers whose qualifications and motives can't be known may not be a good way to learn.

Answer 6

in case you're in Canada that is comparable to what Jeff reported. till that is in an RRSP or different Tax sheltered product, you would be taxed on the dividends. A mutual fund itself isn't a tax seem after, neither is it tax deferred.

Answer 7

No dividends is paid if funds does not grow. If you're
in it for long term don't worry, market fluctuates all the time, but in the long run you will be ahead providing you are diversified in you investment and selected funds with good yield.

Answer 8

yes...as long as the stocks in that mutual fund pay dividends so will the mutual fund itself