4

I am looking at some mutual funds which are holding many dividend stocks as portfolio holdings. I can check that these individual stocks are paying out regular dividends. But the funds don't show any distributions in their history.

  1. So where does the dividend income go for these funds? Or do they just reinvest the dividends in buying more shares of the same stock?
  2. Do the investor have to pay tax on these dividends even though he/she have never actually received it?
Improve this question
1
  • Have you looked into the expense ratio for the fund as the expenses may eat up the dividend yield?
    – JB King
    Aug 23, 2014 at 20:32

1 Answer 1

Reset to default
3

It is not necessary that the mutual fund pays out the dividend.
The money would be used to buy more shares of the same stock or of some other stock depending on overall policy goal of the fund and current allocation of funds. This would increase the NAV of the mutual fund and hence its indirectly comes to you once you sell the mutual fund.

The dividend would not be taxable as its not directly paid out.

Improve this answer
1
  • 2
    I don't think this answer is correct. To the best of my knowledge, in the US, dividends paid out on shares of stock held by mutual funds are taxed as dividend income earned by the funds (that is, the mutual fund pays income tax on the money) unless the dividends are distributed to the shareholders in the funds, in which case the dividends are taxable income to the shareholders. Many shareholders in the mutual fund do chose to re-invest the dividend distributions into additional shares in the mutual fund but that does not change the tax status of the distribution: it is taxable income.
    – Dilip Sarwate
    Aug 23, 2014 at 13:44

You must log in to answer this question.

Not the answer you're looking for? Browse other questions tagged .