What is a mutual fund dividend or distribution?

US tax provisions allow mutual funds to avoid paying state and federal income tax so long as they pay out, or distribute, substantially all of their investment income after expenses to shareowners. At least once per year, mutual funds must pay out any accumulated capital gains, dividend income, and interest income to shareowners as distributions per share. This transfers any tax liability from the mutual fund to their shareowners, who are typically taxed at a lower rate than a fund would be taxed under typical IRS scenarios. 

Throughout the year, mutual fund managers buy and sell securities for the fund's portfolio, generating investment gains and losses. Mutual funds distribute net gains arising from sales of appreciated securities and from accumulated stock dividends and bond interest payments, net of expenses. By default, your distributions are reinvested in shares of the fund. You also have the option to take the distributions in cash.

You can find information about your fund's dividend and distribution schedule in the fund's prospectus. Saturna publishes the dividend and distribution history for each of our affiliated funds here at Saturna.com. 

What's the difference between record date, ex-date, and pay date?

The record date determines your eligibility to receive fund distributions. If you own shares on the record date, you are a shareowner of record, and you will receive a distribution on each share you own as of that date. The ex-date (or ex-dividend date) indicates the first date that shares are not eligible for the distribution. Fund shares purchased on or after the ex-date will not receive the distribution declared on the record date. The pay date (also, payable date, payment date) is the date the mutual fund makes distributions on shares you owned as of the record date. For Saturna's affiliated funds, the ex-date and the pay date are the same.

Record, Ex, Pay Date

How do fund distributions affect my investment?

When a mutual fund makes a distribution of capital gains or pays a dividend, its net asset value (NAV) is reduced by an amount equal to the distribution, so you may see a drop in share value. However, this doesn't mean that you are losing money. If you reinvest the distributions, you will own more shares to make up the difference. If you elect to have your distributions paid out, you'll receive the value in cash. Keep in mind that, due to market fluctuations, the fund's share value may increase or decrease after a distribution. 

Assuming a constant market value, the following example helps explain how distributions can affect your investment.


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Is my mutual fund distribution taxable?

Generally, mutual fund dividends and capital gains distributions are taxable, whether paid out in cash or reinvested, unless held in certain types of tax-advantaged accounts, such as an Individual Retirement Account (IRA) or a 401(k). Municipal bond funds, such as the Idaho Tax-Exempt Fund, may pay interest income dividends exempt from certain state and federal income taxes. 

Taxable distributions are subject to different rates depending on how they were generated. For example, short-term capital gains are generally taxed at a higher rate than long-term gains. Whether the gain was short-term or long-term is determined by how long the fund has held the investment, not how long you've held shares of the fund. Dividends are typically taxed as ordinary income, and qualified income dividends are taxed at a lower rate. Saturna Capital reports annual distributions to you on a Consolidated 1099 Form in February.

For additional information about optimizing your investment taxes, consult your adviser or a tax professional.