One way that mutual funds can provide returns to investors is through the payment of dividends. Some options on a mutual fund list will pay regular or monthly dividend distributions, while others may pay dividends only once a year. When you're seeking new investment options from a mutual funds company, you should focus on mutual funds with a policy of regular dividend payments as well as consider how much in dividends you'll receive.
Consider also: Financial Lit: Dividends
Video of the Day
Video of the Day
Mutual Funds Company Earnings
Mutual funds can generate earnings from stock dividends if the fund is a stock fund, or bond interest in the case of bond funds. Mutual funds are required by law to pay out all dividends or interest earned on the portfolio minus fund expenses. Stock mutual funds that hold dividend-paying stocks will usually pay out any dividends earned by the portfolio as a fund dividend each quarter. Most bond funds will pay a monthly dividend to distribute the interest earned from the bonds portfolio.
Mutual Fund Dividend Payment Calculation
To calculate the amount of a dividend payment, the mutual fund management will add up all of the income received from the fund's portfolio, subtract fund expenses and divide the result by the total number of shares the fund's investors own. Depending on the makeup of the fund's portfolio, the dividend amount for a stock fund may vary slightly or significantly from quarter to quarter.
Bond fund managers have a better idea of the amount of interest the fund's portfolio will earn. Bond funds usually pay the same dividend amount each month until interest rates change significantly.
Consider also: How to Calculate Investment Income
Payout Consistency for Dividends
Investors can find a listing of recent dividend amounts on a particular mutual fund's Web page. Make a note of how often and when dividends are paid by the fund. The amount of recent dividends should be reviewed for the consistency of the payout amount. If the fund's dividends have stayed at the same level for the last several payments, the most recent amount can be used to calculate an estimate for the next dividend payment.
Calculating Mutual Fund Cash Dividends
To calculate an estimate of the next dividend payment, an investor needs the number of fund shares they own and the amount of the last per-share dividend payment. For example, if the investor owns 1,000 shares of a bond fund and the fund has been paying a 9 cent dividend every month, multiply 1,000 times 0.09 to get an expected dividend of $90. This estimated dividend will be accurate only if the fund has a stable dividend payout.
If you'd prefer a quicker option than calculating the dividends yourself, you can try a mutual fund cash dividend calculator.
Reinvesting Mutual Fund Dividends
Mutual fund investors have the option of taking fund dividends in cash or reinvesting the dividend payments into more shares of the fund. Reinvesting fund dividends allows the number of shares and the amount of each dividend payment to increase over time. A fund's per-share dividend amount is multiplied by the number of shares an investor owns. If dividends are reinvested, the number of shares will increase and so will the dividend received by the investor.
Consider also: Top 10 Best Things to Invest In