Question about dividends

[bobongo]

Say I own a bond fund, and of course it pays a dividend. So, when the dividend rolls around, the amount of shares I own in the fund is increased to reflect the dividend. But the price of the shares decreases by the same value. So, how am I making money on the dividend? It seems like robbing Peter to pay Paul. I have never understood this. Can somebody explain how the dividend benefits me?

 

[GT33]

Someone can correct me if I misstated something here.

You start the year with 100 shares of the bond fund with a price of $100/share which equals $10k in the bond fund.

Through the year the 100 shares you own earns 10% and is now worth $110/share or you now have $11k in the bond fund.

On the ex-date, they pay out $10/share in dividends. On that date you own the same 100 shares, they now have a price of $100 again plus you own $1k in dividends.

Your dividends can either be paid to you in cash or reinvested.

If you reinvest, your $1k in dividends is buy you 10 shares. You now would own 110 shares at $100/share which equals $11k in the bond fund.

You don't "make money" or "lose money" on a dividend payout. That's just not possible otherwise the bond fund company would either be giving you money or taking it away. Neither is permitted.

 

[bobongo]

Someone can correct me if I misstated something here.

You start the year with 100 shares of the bond fund with a price of $100/share which equals $10k in the bond fund.

Through the year the 100 shares you own earns 10% and is now worth $110/share or you now have $11k in the bond fund.

On the ex-date, they pay out $10/share in dividends. On that date you own the same 100 shares, they now have a price of $100 again plus you own $1k in dividends.

Your dividends can either be paid to you in cash or reinvested.

If you reinvest, your $1k in dividends is buy you 10 shares. You now would own 110 shares at $100/share which equals $11k in the bond fund.

You don't "make money" or "lose money" on a dividend payout. That's just not possible otherwise the bond fund company would either be giving you money or taking it away. Neither is permitted.

In my experience (I recently bought a bond fund), the dividend increases the number of shares but decreases the price of those shares. The increase in the number of shares is offset by the decrease in price.
So, how does the dividend benefit me?

 

[GT33]

In my experience (I recently bought a bond fund), the dividend increases the number of shares but decreases the price of those shares. The increase in the number of shares is offset by the decrease in price.
So, how does the dividend benefit me?

A dividend has ZERO benefit. The fund is playing by its rules and all they're doing is their fiduciary responsibility as stated in the fund rules. You don't make or lose money on the dividend payout as I stated above. The money you "made" was already there assuming the fund appreciated in value (not all do).

Now your fund either stays the same, decreases in value or increases in value. If the value of the fund is the same as last year, I'd get out of that dog & into something that makes money. If you're losing money in that fund, run for the hills. You got a loser.

Your fund maybe making money, but if your return over time is less than the average market return, I'd get out of that as well. Many claim the market average is about 7%. I have a personal floor of 10% that's my rule. If you're making around that, your fund is a solid performer.

If you're making consistently about market return, hang onto that baby or buy some more. That fund Manager is a star.

 

[awbuzz]

In my experience (I recently bought a bond fund), the dividend increases the number of shares but decreases the price of those shares. The increase in the number of shares is offset by the decrease in price.
So, how does the dividend benefit me?

In the example, your initial investment was $10K, you now have $11K after one year.

 

[bobongo]

In the example, your initial investment was $10K, you now have $11K after one year.

The example is not my experience. When I get a dividend, the number of shares increases but the price of the shares decreases to offset the increase in the number of shares. All bond funds do this, as I understand it. I must be benefitting from the dividend somehow, but my question is, how?

 

[GT33]

The example is not my experience. When I get a dividend, the number of shares increases but the price of the shares decreases to offset the increase in the number of shares. All bond funds do this, as I understand it. I must be benefitting from the dividend somehow, but my question is, how?

You need someone else to help you out here because I tried twice and obviously I have not been clear enough.

This is my last attempt: The act of paying a dividend has ABSOLUTELY ZERO BENEFIT TO YOU or anyone else. None. Zero. Zip. Nada. Nothing.

The only value you get from holding any financial investment is if the investment increases in value relative to inflation. If that did not happen, you either broke even or lost money.

 

[awbuzz]

Your benefit is you own more shares or your received cash. That's a win. (exception is if rate skyrocketed and you were force to sell your shares when the bond price is dropping as explained below).

One issue you have is that ETFs and Bond Funds, buy and sell so they may not (most likely not) holding until maturity for each bond they hold.

Bonds are bought at a price, then interest (dividend) is paid on a scheduled basis. If held to maturity you'd get the interest over time plus your original money back. If sold before maturity the price you get for the bond is subject to the current interest rate market. If rates are up, you'll get less for your bond, and vice versa.

This link might help - https://www.etf.com/etf-education-center/etf-basics/how-do-bond-etfs-work

Below (from dtf.com) explains why a bonds price would decrease in a environment of rising interest rates.

• A hypothetical $100 bond has a 5 percent coupon—meaning, every year, the bond will pay out $5 to investors until it matures. Then interest rates rise 2 percent. The bond issuer decides to issue a new bond that's identical to the first, except that it now carries a 7 percent coupon.
• Given the choice between the 5 percent bond and the 7 percent one, who would choose to own the one that pays less money? Nobody, if the price remained the same $100. It doesn't, of course. The bond's price drops to make it comparable to the yield of the 7 percent bond. So if you own the 5 percent bond, you'll still receive your $5 every year, but the bond's market price—or the price you'd get if you sold the bond today—would decrease.