Overhead Office

Dividends and the Lag in Fund Values

Overhead Office


As we approach a calendar quarter-end, investors should be expecting both dividend and/or capital gain distributions from their mutual funds. The mechanics may confuse some investors, so we wanted to take the opportunity to review the process. To keep the explanation simple, we are going to just discuss dividend distributions and not repeat each time long term and short capital gains distribitions are handled in the same manner.  We are also only going to consider the case where investors have elected to have their dividends automatically reinvested. The screen captures shown below are from a Charles Schwab account, but the presentation should be similar for Fidelity and TD Ameritrade. 

The Basics

Equity mutual funds are made up of individual stocks. When these stocks pay a dividend, it is passed through to investors just before the calendar quarter-end.

When a mutual fund pays a dividend, there are three dates that are particularly important to investors: the “Record Date,” the “Ex-Dividend Date,” and the “Payable Date.”

The “Record Date” is the official date in which we must be a shareholder of the fund to receive the dividend.

The “Ex-Dividend Date” is the date in which the dividend is paid and we see a price reduction of the fund equal to the amount of the dividend and any market price change. For example, if a mutual fund pays a $0.25 dividend and the change in market price is a negative $0.10, investors will see the price of the fund decline by $0.35. This total change in the price of the fund is the reason for this article, because the dollar value of that dividend and the change in the number of mutual fund shares in the account do not show up until the next morning and it appears to investors that they lost more money on this ex-dividend date than the $0.10 market decline.

The “Payable Date” is the date in which the dividend is reinvested in more shares (with no transaction fee) and recorded as a transaction in the History & Statements tab of investors account. The cash dividend will be reinvested in more shares as of the closing price on the “Ex-Dividend Date,” resulting in more shares than the investor had on the “Ex-Dividend Date" (the day before). This brings the account back to its record date value, except for market price changes. The only difference for taxable accounts is that the dividend created a tax liability for the investor.

Many IFA clients don’t watch their accounts on a daily basis, so they may not notice these changes we are going to discuss. However, some clients do watch their accounts more closely, so we wanted to explain what happens in accounts during this time of dividend distribution and reinvestment. A common question we are asked is, “why did the price of this fund go down when a comparable index was up or why did my fund go down more than the comparable index?" In short, it has to do with the dividend payment and the overnight lag in the reinvestment of those dividends.

Here are a series of screen captures and descriptions to explain the process of dividend payment and reinvestment.

The Date of Record

June 28, 2017 was the "Date of Record" for the DFA U.S. Small Cap Value Fund (DFSVX). The image below shows a typical “Positions” page for a client whose assets are held at Charles Schwab. Because you can set up your own display of columns, your screen may look different. If we look at the DFSVX position we see a closing price of $36.76. With a Quantity of 1,000 shares, the total Market Value is shown as $36,760.00. The price change is PLUS $0.62 because the price is $0.62 higher than it was at the close of the market the day before. In terms of a percentage, this equates to a 1.69% increase in the value of DFSVX.

June 28th Screen Capture

The Ex-Dividend Date

The next day, June 29th, was the "Ex-Dividend Date" for DFSVX shareholders of record. DFSVX closed at $36.60 per share, which was $0.16 less than the day before. This decline of $0.16 was made up of the subtraction of $0.07453 for the dividend payment and a $0.08547 market price reduction from the day before. In percentage terms, the price decreased by 0.44%, of which 0.20% came from the dividend payment and 0.24% came from market price reduction.

A dividend of $0.07453 per share was distributed, but the cash or reinvested dividends were not visible in this evening screen shot. As you will see in a minute, the reinvested dividend is not visible until the next morning. With 1,000 shares of DFSVX, we should be expecting to receive approximately $74.53 in total dividends. Given today's closing price of $36.60/share, we should get 2.036 additional shares on the morning of June 30, 2017.

The image below shows the same “Positions” page as of the evening of the market close on June 29, 2017 (Ex-Dividend Date).

June 29th (evening) Screen Capture



The Payable Date (morning)

The image below shows the same “Positions” page on the morning of June 30, 2017 (the Payable Date). Overnight, Schwab completed the transaction to the purchase more shares of DFSVX from the cash dividend. The $74.53 in dividend payments on June 29th was reinvested at the June 29th closing price of $36.60, so the new quantity of shares increased by 2.036 ($74.53 of cash divided by the $36.60 per share). As a result, the Quantity of shares increased from 1,000.000 to 1,002.036. At that point in time, the pre-dividend and post-dividend Market Values are the same, except for the market price change.

If you take the $36,674.53 Market Value from the morning of June 30th and add back the market decline of June 29th ($0.08547 times 1,000 shares = $85.47), you get the exact same value of $36,760.00, which was the closing Market Value of June 28th. So the dividend payment did not add anything to the investor's Market Value. However, if you held this fund in a taxable account, a dividend payment results in an overall negative event because you ended up with a tax liability for the dividend. Most investors think they are getting something extra for their dividend, but they are not and for taxable investors, it actually has a negative impact after we account for taxes. 

Our total market value has now increased to $36,674.53. The percentage increase in the market value from the dividend is PLUS 0.20% compared to the night before, which is the offset to the MINUS 0.20% that we lost because of the dividend payment. Since this is a morning screen capture, we also see that the Day Change is 0.00 in terms of price and percentage because the market hasn’t closed for June 30th.

Another way to look at this is to assume the dividend payment never happened. On June 29th, the market price of DFSVX would have decreased by $0.08547 (-0.24%) and we would have ended with a Total Account Value of $36,674.53 (1,000 shares x $36.67) or the exact same value we see on the morning of June 30, 2017, after accounting for the dividend reinvestment.

June 30th (morning) Screen Capture

The Payable Date (evening)

The image below shows the same “Positions” page as of the market CLOSE on June 30, 2017 (Payable Date).

If we look at the DFSVX position we see a closing price of $36.59, which is $0.01 lower than it was the day before due to a market price change. With 1,002.036 shares, our total Market Value now comes out to $36,664.51. In terms of a percentage, this equates to a 0.03% decrease in the value of DFSVX.

June 30th (evening) Screen Capture



Our dividend payment and reinvestment process is now complete from "Date of Record" to "Ex-Dividend Date" and finally to the morning and evening of the "Payable Date." 

Capital Gains Distributions

As we mentioned in the introduction, the same process can be applied to long term and short term capital gains distributions. Throughout the year, fund managers buy and sell securities. They earn distributable capital gains when the gains exceed losses, which accumulate and add to the price of the fund until they are distributed. Once they are distributed, the price of the fund will decrease by the amount of the capital gains. Most capital gains are distributed at the year-end and when dividends are added, this creates a much larger total distibution versus other quarters. Similar to dividends, investors do not lose or gain any money in the process. But there are tax liabilities created by both distributions, which is one good reason to take advantage of tax loss harvesting opportunities when they exist.

If you have further questions regarding dividends and capital gains distributions and their effect on the price of a fund, please contact your IFA Wealth Advisor at 888-643-3133.