Question
I have a number of equity income unit trusts some inside and some outside an ISA wrapper. Occasionally I may switch from one unit trust to another and I usually try to ensure that I sell after the fund becomes ex-dividend so that I manage to still receive the next payment of dividend income. I may also try to buy into a fund before the ex-dividend date for similar reasons but am I then buying in at a higher price in order to receive the dividend?
Forgetting fund performance and stock market levels for a moment,my question is,is the price of a fund affected in the same way as an ordinary stock holding when it becomes ex-dividend.Usually the price of a stock reduces but what generally happens to a unit trust holding of income shares,does it go down also?
Am I sensible to look at dividends in this way or does it just mean that what I gain in income I lose in the price when switching funds?
I am sure you will remind me that these should be looked at as long term holdings etc and it probably doesn't matter in the long term but I would be interested to know what thoughts you may have.Answer
Yes, the price of a unit trust should reflect the dividends that are due to be paid out, so you’d expect to price to fall on the ex-dividend date.
The fund will receive dividends from the stocks it owns at various times of year. Paying out dividends to investors every time they’re received would be inconvenient, so the fund manager puts them in the bank and then pays out the balance on set dates, for example every January and July. When a unit trust is priced each day the bank balance is included, so the dividends to be paid out are reflected in a fund’s unit price.
Once a fund goes ex-dividend, usually about two months before the dividend is due to be paid, then the money set aside for the dividend is no longer included when calculating the unit price, so it falls accordingly.
Note, if you purchase units before the ex-dividend date, your first income payment could include some income covering a period before you bought the units. This part of the income is called an equalisation payment. It's not subject to income tax and must be deducted from the price you paid for units when calculating capital gains tax.
Bottom line, you’re unlikely to gain overall from buying a fund before it goes ex-dividend (versus buying it ex-dividend) so I wouldn’t worry about making this part of your investment strategy.
I have a number of equity income unit trusts some inside and some outside an ISA wrapper. Occasionally I may switch from one unit trust to another and I usually try to ensure that I sell after the fund becomes ex-dividend so that I manage to still receive the next payment of dividend income. I may also try to buy into a fund before the ex-dividend date for similar reasons but am I then buying in at a higher price in order to receive the dividend?
Forgetting fund performance and stock market levels for a moment,my question is,is the price of a fund affected in the same way as an ordinary stock holding when it becomes ex-dividend.Usually the price of a stock reduces but what generally happens to a unit trust holding of income shares,does it go down also?
Am I sensible to look at dividends in this way or does it just mean that what I gain in income I lose in the price when switching funds?
I am sure you will remind me that these should be looked at as long term holdings etc and it probably doesn't matter in the long term but I would be interested to know what thoughts you may have.Answer
Yes, the price of a unit trust should reflect the dividends that are due to be paid out, so you’d expect to price to fall on the ex-dividend date.
The fund will receive dividends from the stocks it owns at various times of year. Paying out dividends to investors every time they’re received would be inconvenient, so the fund manager puts them in the bank and then pays out the balance on set dates, for example every January and July. When a unit trust is priced each day the bank balance is included, so the dividends to be paid out are reflected in a fund’s unit price.
Once a fund goes ex-dividend, usually about two months before the dividend is due to be paid, then the money set aside for the dividend is no longer included when calculating the unit price, so it falls accordingly.
Note, if you purchase units before the ex-dividend date, your first income payment could include some income covering a period before you bought the units. This part of the income is called an equalisation payment. It's not subject to income tax and must be deducted from the price you paid for units when calculating capital gains tax.
Bottom line, you’re unlikely to gain overall from buying a fund before it goes ex-dividend (versus buying it ex-dividend) so I wouldn’t worry about making this part of your investment strategy.
Read this Q and A at http://www.candidmoney.com/questions/question241.aspx
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