So periodically I receive a dividend from my index funds, which is then reinvested in said index fund. In the case of the S&P 500, obviously that’s Ford and Coca-Cola, etc paying their dividends to the fund, of which I own shares. Got that.
BUT, these companies are paying dividends at all different time, not on one magic DivDay. So where is that money between when it pays to (ie) Fidelity, and when Fidelity bundles it up and pays it to me?
Is it sitting in some account, waiting for the end of the Q, and earning Fidelity money? If so, I think that should be my money…
Is interest accrued somehow accounted for and given back to me? That seems more reasonable.
I’m assuming the fund you own is SPY which is run by State Street, not Fidelity. When State Street pays a dividend to your broker (Fidelity?), Fidelity passes it immediately to you.
SPY owns so many different stocks that paying 42 dividends a quarter would be an administrative pain in the neck. You would pay those administrative expenses somehow.
State Street keeps the interest as part of their fees, otherwise your 1099 at the end of the year would have an entry labeled “interest”.
You could own all the stocks that SPY owns and collect the dividends as they are paid.
I have not read the actual law on this*, but this is how I understand it to work in the general sense. The Mutual Fund receives dividends during the year. It also pays expenses the fund has during the year, such as the managers’ salaries. Near the end of the year, the mutual fund sees how much profit it has made from dividends less overhead expenses, and distributes it to the holders of the fund. If your mutual fund pays out more than just at the end of the year, there’s two ways that they might do it. One is to have a steady dividend of what they definitely expect to be available, and pay that out quarterly or monthly, and then only at the end of the year pay out the rest of it. I’m pretty sure American Funds does this based on my few years of being forced to use them for my work SIMPLE IRA. You can also just pay out whatever you earned that month/quarter, but that requires more work to figure out exactly how much you have available to pay out. Dividends are slightly different than with capital gains, that the fund is required to pass on to its holders exactly as-is AFAIK. These are likely to be paid out the same time as dividends. Keep in mind that they also net the gains with losses before passing them out, and the same is true between periods if there’s a net loss and also if there’s a period in which the expenses exceed the dividends they received. The gold mining fund I invest in didn’t pay dividends for a few years despite having plenty of dividend-bearing investments - the price of gold just wasn’t high enough that the dividends they could afford to be paid made up for the expenses of the fund.
What happens to this money between the time the fund gets paid it and it’s passed on to the owner’s of the fund? Possibly it gets put into very low-risk securities with a maturity on the date that it needs to be paid out, ie, specific US treasury bills/notes/whatever they’re called for that duration. It’s also possible they just reinvest it in the fund’s security basket instead and sell some securities when they need to pay out the dividend, though this is a bit risky. I can’t say what investments they put it in for that time, as it may depend on the policy of the fund. I’ve never worked for a fund, just invested in them.
*That is, the necessary requirements of a maintaining status as a Regulated Investment Company (RIC) that mutual funds are one type of in order to preserve the lack of entity-level tax there normally would be on corporations. REITs have criteria specific to real estate that are rather different than those of other RICs, and I don’t know how exactly the mutual fund calculates how much it has available to distribute in dividends, but dividends are certainly where they get the funds to operate the fund itself.
ETF index funds pay a dividend, which is obviously the sum of the component stock dividends, usually quarterly or twice a year. That’s just a matter of administrative convenience.
If they have excess cash on hand they invest it to earn interest as part of the fund’s routine operations, and the interest is retained within the fund or paid out as dividend. If you own shares in the fund then you own that cash just as much as you own the component stocks. Fund managers earn a specified fee, they can’t just skim off cash (or interest on that cash) that’s owned by shareholders.
Your 1099 will state what proportion of the dividend paid out by an ETF index fund is Qualified Dividends that get better tax treatment - usually most or all for a U.S. fund held for a long period, somewhat less for an international fund.
The money is received by the fund and invested consistent with the fund’s investment objectives as described in the prospectus. Dividends are just money like any other money invested in the fund.
It is your money, and it will be invested for you on your behalf by the fund. The fund’s adviser doesn’t make any special income from your dividend. It does get an asset-based fee for running the fund, but that fee is the same for all the money invested in the fund, including the dividends.
If the dividend is invested in interest-bearing investments, it will earn interest for the fund (in effect, for all of the fund’s shareholders, including you). It might be invested in stocks, with the aim of generating capital gains but again, those capital gains accrue to the fund for the benefit of the fund’s shareholders.