Dividends –> Fall in Share Price
Those well-versed in dividend stocks know that right before a payout, the share price of a stock will fall to compensate (or equivalently, will rise before the dividend date above fundamental value). Some asked:
When I get a dividend from my mutual fund, the share price of the fund drops almost proportionately with the amount of the dividend. When I receive a 5 percent dividend, the value of a $10 share drops to $9.50. What have I gained?
During the year, some of the stocks in the mutual fund portfolio may earn dividends. Some of the bonds and cash instruments may earn interest. The fund manager may sell some of the stocks, bonds and other securities in the fund during the year, replacing them with others.
If the fund manager sells the securities for more than he paid to buy them, the fund, in tax jargon, ‘’realizes’’ a capital gain.
When any of this happens - the fund receives a dividend or interest, or realizes a capital gain - the fund’s share price, all other things being equal, will generally go up to reflect the money the fund has earned. That’s the good part. The bad part is, somebody has to pay taxes on all the money the fund is earning, and that’s you.