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| Pathways Advisory Group, Inc. Evon Mendrin, CFP® |
If you’re investing in mutual funds, a curious thing tends to happen each quarter. The value of your funds all suddenly dip! What is the cause? A market calamity across every type of investment??
While regular market activity might affect the value too,
one key reason for the dip in prices is the dividend. Mutual funds hold a bunch
of stocks, bonds, and other investments. These stocks may pay dividends and the
bonds interest. To avoid paying taxes on this income themselves, mutual funds
are required to pass them on to you, the shareholder. This can be done
annually, but often each quarter. You may see larger capital gain distributions
at the end of the year as well.
That’s a good thing, right? Sure, you are able to benefit
from the cash flow of the many stocks and bonds you are invested in. However,
it does something funny to the price. Each quarter, mutual funds that pay
dividends will reduce their share prices by the same amount of the dividend
being paid out. This happens on the “ex-dividend” date, the first date you can
buy the mutual fund but not have a right to receive that quarter’s dividend.
For example, let’s say XYZ Stock Fund has a current price of
$10.00 per share. The fund is set to pay a $0.10 per share dividend on Friday.
So, on Thursday, the “ex-dividend” date, the price will drop by the same amount
to $9.90 per share.
This makes sense – cash leaves the mutual fund, which lowers its total value of assets (Net Asset Value). So,
the price adjusts accordingly. And you, the current owner, still end up the
same financially. Your fund goes down $0.10, but you get a $0.10 cash dividend.
Why now? It’s now that time of year! In fact, the 16th - 18th of this month marked the “ex-dividend” date for many of the
mutual fund we invest in. We hope this post sheds some light on the change in
prices.
Happy Dividend Season and Happy Holidays!
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