UNDERSTANDING HOW YOUR SECURITIES FUNCTION MIGHT SAVE YOU SOME GRIEF!

Investors sometimes panic when they check the price-per-share of their stocks or mutual funds. Today, May 13 (with May 15 being a Sunday), I checked one of my stocks and, of course, a dividend was paid.  So, now I own a few more shares at a slightly lower price. Other investors may opt to receive the dividend in cash, and either have it deposited to one of their accounts, or have a check mailed, depending upon your securities firm’s options.

Dividends of both stocks (including ETFs) and mutual funds, at least those that pay them, are usually on a regular cycle, which oftentimes begins on February 15 (and May, August and November); however, dividends can be paid-out in any cycle that the corporation or fund company wishes.

Additionally, companies are not required to pay dividends.  In fact they may skip a payment, the amount may change, or they may even stop paying them. But, when they are paid—whether in cash or additional shares—that would be a taxable event, unless the securities are held in a tax-deferred account, such as an IRA or 401(k).  New corporations (but usually not mutual funds) might not pay dividends if they believe that they can serve the shareholders’ interests better by re-investing the same available cash back into the company.

There is one other twist, regarding mutual funds, that often causes considerable anguish to shareholders.  U. S. Securities Laws, which were written back in the 1930s, permit mutual funds to merely pass income through to their respective shareholders and, thus, not be taxed themselves.  This is how partnerships generally operate.

Since quarterly stock dividends might only be a fraction of a percent at any one distribution date—but several percent when annualized—they often hardly move the needle.  Capital gains distributions, however, either long-term or short, can be much larger.  The fund companies generally try to balance-out their capital gains and losses, so as to reduce the tax-impact on their investors.

Those 1930s securities laws require that the bulk of capital gains be distributed in the year realized, or the IRS might begin to tax the fund directly.  Another problem with this scenario is that the shareholders who own the mutual fund(s) now might not even be the ones who owned it, and thus benefitted, when the securities’ market value ran-up.  In fact, many investors saw the market value of technology-heavy funds they owned start to drop precipitously when the Dot-Com bubble started to burst in 2000.

Accordingly, fund managers had to liquidate stocks, both to pay-off liquidations, and to avert seeing the market values decline even more.  During that mostly NASDAQ decline, many investors ended-up paying taxes on mutual funds that they had actually lost money on.  They got in after the big run-up; but, they were the ones left owning the shares when the managers had to liquidate.  And of course, the managers decided to sell their better-performing securities, so as not to irk the investors even more.

It would be quite useful to understand your securities firm’s web site, which should enable you to check your overall portfolio value, number of shares owned of each security, note any recent dividends or capital gains received, etc.  You should also be able to review past statements, account activity, confirmations of securities bought and sold.  In fact, if you have multiple accounts at the same firm, you should be able to group them, in order to review your total portfolio at one time, rather than skip from account to account.

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