Quarterly vs yearly dividends

[ashantiwarrior]

I've just noticed that the Fidelity World Index tracker fund pays a quarterly dividend for the income fund and an annual dividend for the accumulator fund.

The fees for each are the same at 0.13%. Am a better to invest in the income fund to get the quarterly payments even if I reinvest them in the same fund straight away ?

[Pet Hog]

ashantiwarrior, are these the two funds?

https://www.fidelity.co.uk/fund-superma ... 00BP8RYB62

https://www.fidelity.co.uk/fund-superma ... 00BJS8SJ34

All things being equal, and if there is no difference between the two funds apart from their dividend payout frequency, then I would do as you proposed and reinvest the quarterly dividend and get some benefit from compounding.  Having said that, a dividend of 1.8300% when compounded quarterly (and assuming equal dividend payments throughout the year) becomes 1.8426% -- an annual benefit of just $126 on a $1 million investment.  So we're not talking about much of a bonus.

[ashantiwarrior]

Yes, those are the two funds. The compounding effect is small but I am unclear about the impact of selling the fund before the annual payments, say on month 9. Do you get the prorated share of the final year dividend or lose it all. If you lose it then the income share would be better. I've asked Fidelity but await an answer on email.

[rickb]

Yes, those are the two funds. The compounding effect is small but I am unclear about the impact of selling the fund before the annual payments, say on month 9. Do you get the prorated share of the final year dividend or lose it all. If you lose it then the income share would be better. I've asked Fidelity but await an answer on email.

If you own an individual bond and sell it, the buyer pays you prorated interested up to the day of the sale.  This means that a bond's net asset value includes the prorated interest, which means the NAV of the fund includes prorated interest.  The flip side of this is that the NAV decreases on the day the fund distributes dividends.  Assuming the NAV wouldn't otherwise change, the NAV the day before a dividend is paid is the sum of the NAV the day after plus the per share dividend amount.

[ashantiwarrior]

Thanks, yes. I own individual bonds and have benefitted from this. Do mutual funds offer the same benefit ?

[mathjak107]

Funds and stocks all work the same way.

The day after the dividend the nav is automatically lowered by the pay out  at the start of the next quarter so the nav plus payout merely equals the day before.

If you don' t reinvest the dividends you will have less dollars compounding for you after the payout then you did before

[ashantiwarrior]

I just spoke to Fidelity and got an answer, for their World Index Fund if you are not a holder on the day of the dividend payment you lose the funds ! So that is one to watch. Moving to the income fund will limit a loss in the event of a sale since it pays out four times a year rather than once a year. I for one plan to do that.

[rickb]

I just spoke to Fidelity and got an answer, for their World Index Fund if you are not a holder on the day of the dividend payment you lose the funds ! So that is one to watch. Moving to the income fund will limit a loss in the event of a sale since it pays out four times a year rather than once a year. I for one plan to do that.

Right.  If you are not a holder on the day of the dividend payment you don't get the dividend.  But you also don't endure the exactly equal drop in the NAV of the fund on that day either.

If the price of the fund the day before a $Y dividend is paid is $X, the day the dividend is paid you get the dividend, but the price of the fund drops to $X-$Y.  You still have $X per share, but some of this is now dividend.