Dividends from stock or funds are obviously considered to be an earnings benefit or a gain or a plus, but I'm wondering how that is monetarily computed? I know it is added to the gain income, but I mean, what is the rationale for that?
The company (or the companies in a fund) pay the dividend out of their cash reserves. But it is no gift in the market, because the stock or fund price and value immediately drops by an equal amount. So it is clearly only the same effect as any normal withdrawal. It was my own fund money returned either way. Tax is owed either way, except the dividend has a zero cost basis, and a withdrawal likely has some cost basis (reducing tax on the withdrawn amount). What am I missing? Why invent dividends? How is that a gain?
When my bank pays monthly interest (such as it is), my deposit increases by the amount instead of decreasing by the amount. That is a major difference. There must be an assumption that stock dividend expectation has slightly increased the sale price, actually increasing fund value first, but I don't see how it could be proved.
The only plus that I can imagine is that when and if the dividend is reinvested, the value of the increased shares at the lower price remains exactly the same (no advantage, no actual income change yet). The increased cost basis more or less offsets the necessary tax paid, but only at some time in the future. However, since the reinvestment is a purchase that does buy a slightly higher share count, of still the same value, more shares in the fund could earn a little greater gain in the future. I see no way to quantify that, but I'd suppose a 2% dividend, if reinvested, is 2% more shares and a higher cost basis (compared to if no transaction had occurred at all). Is that the whole story of dividends?
I have no experience with bond funds, do they act the same or not? If actual paper bonds are owned until redemption, their redeemed price can't change because of any dividend (and then interest was actual income). But bond funds may not be able to hold them until maturity due to clients cashing in.