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Dividends and Capital Gains
A distribution is a payout to shareholders resulting from a mutual fund's realized capital gains, interest or dividend income. Distributions will vary depending on a fund's income and any profits collected from the sale of securities in a fund's portfolio.
Dividends. A fund will pay out dividends derived from interest received from its bond holdings or dividends received from its stock holdings. Dividends may be paid out monthly, quarterly, semiannually or annually, depending on the fund.
Capital gain distributions. Capital gain distributions are the profits realized from the sale of stocks or bonds in a fund's portfolio. Each time a fund sells a security in its portfolio, a gain or a loss is realized on the sale. Generally, once a year (though sometimes more often) a fund will distribute the net realized longer-term capital gain (gains minus losses) of the portfolio to the fund's shareholders. All mutual funds, regardless of performance, are required by law to pay shareholders any net realized gains from the sale of individual securities in their portfolios.
Frequently Asked Questions
Who is eligible to receive a distribution? Shareholders of record, as of 4 p.m. EST (1 p.m. PST) on a fund’s record date, are eligible to receive a fund’s distribution.
When are distributions deducted from the fund’s NAV? The distribution amount per share is deducted from the fund’s net asset value (NAV) per share on the fund’s ex-dividend date.
When are distributions paid? Eligible shareholders are paid their proportional share of the distribution on the fund’s payable date or reinvestment date.
Can distributions be reinvested? Yes. Most mutual funds offer the option for shareholders to automatically reinvest dividends and capital gain distributions at NAV. This option can be an easy and effective way to grow your investment account over time.
What happens when I "buy a dividend”? If you invest in a fund shortly before it makes a capital gain distribution or dividend payment, you may receive some of your investment back in the form of a taxable distribution.
Are distributions taxed? If held in a taxable account, distributions are generally taxed whether they're paid out in cash to the shareholder or reinvested.
How is a fund's share price affected by a capital gain distribution? A capital gain distribution will lower the fund's share price (NAV) by the amount of the distribution. If you choose to reinvest your capital gain distributions, then the number of shares in your account will increase accordingly, and your account value will remain the same.
Is it possible for a fund to distribute capital gains when performance for the year was negative? Yes. Even if a fund's overall performance for the year was down, the fund might still have realized profits that need to be distributed to shareholders.
Do fund dividends always stay the same? No. Although dividend-paying stock and bond funds may generally seek to pay relatively regular dividends to their shareholders, dividend amounts will vary, depending on the fund’s income. And past distributions are not an indication of future distributions.
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