Overhead Office

Dividends and the Lag in Fund Values

Overhead Office


At the end of each quarter, investors should expect dividend and/or capital gain distributions from their mutual funds. The mechanics may confuse some investors, however. So we wanted to take an opportunity to review this process.

To keep our explanation simple, we'll stick to just reviewing dividend distributions -- not repeating each time how long- and short-term capital gain distributions are handled in the same fashion.  

We are also only going to consider the case where investors have elected to have their dividends automatically reinvested. (Also worth noting: while the screen captures shown below are of a Charles Schwab account, the presentation should be similar for Fidelity and TD Ameritrade accounts.) 

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

March 27, 2018 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 $36.58. With a Quantity of 1,000 shares, the total Market Value is shown as $36,580.00

The price change is MINUS $0.69 because the price is $0.69 less than it was at the close of the market the day before. In terms of a percentage, this equates to a 1.85% decrease in the value of DFSVX.

March 27th Screen Capture

Dividends and the Lag in Fund Values Screen Cap 1

The Ex-Dividend Date

The next day, March 28th, was the "Ex-Dividend Date" for DFSVX shareholders of record. DFSVX closed at $36.65 per share, which was $0.07 more than the day before. This increase of $0.07 was made up of the subtraction of $0.00118 for the dividend payment and a $0.07118 market price increase from the day before.

A dividend of $0.00118 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 $1.18 in total dividends. Given today's closing price of $36.65/share, we should get .032 additional shares on the morning of March 29, 2018.

The image below shows the same “Positions” page as of the evening of the market close on March 28, 2018 (Ex-Dividend Date).

March 28th (evening) Screen Capture

Dividends and the Lag in Fund Values Screen Cap 2

The Payable Date (morning)

The image below shows the same “Positions” page on the morning of March 29, 2018 (the Payable Date). Overnight, Schwab completed the transaction to the purchase more shares of DFSVX from the cash dividend. The $1.18 in dividend payments on March 28th was reinvested at the March 28th closing price of $36.65, so the new quantity of shares increased by .032 ($1.18 of cash divided by the $36.65 per share). As a result, the Quantity of shares increased from 1,000.000 to 1,000.032. 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 $36,651.18 Market Value from the morning of March 29th and add back the market decline of March 28th (-$0.07118 times 1,000 shares = -$71.18), you get the exact same value of $36,580.00, which was the closing Market Value of March 27. 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 $36,651.18.

March 29th (morning) Screen Capture

Dividends and the Lag in Fund Values Screen Cap 3

The Payable Date (market close)

The image below shows the same “Positions” page as of the market CLOSE on March 29, 2018 (Payable Date).

If we look at the DFSVX position we see a closing price of $37.03, which is $0.38 higher than it was the day before due to a market price change. With 1,000.032 shares, our total Market Value now comes out to $37,031.19. In terms of a percentage, this equates to a 1.04 % increase in the value of DFSVX.

March 29th (market close) Screen Capture

Dividends and the Lag in Fund Values Screen Cap 4

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.