Distribution

What is a distribution?
A distribution is a payment of cash or assets from a financial vehicle (a fund, account, trust, or issuer) to an investor or beneficiary. In everyday investing it most often means dividends, interest, capital‑gain payouts or required withdrawals from retirement plans. Distributions typically flow directly to the owner’s account or are mailed as a check.

Key definitions (first use of jargon)
– Dividend: a company’s cash payment to shareholders from profits.
– Capital gain distribution: a fund’s payout to owners when the fund sells an asset for a profit.
– Net asset value (NAV): the per‑share value of a fund’s holdings; it falls when the fund pays a distribution.
– Required minimum distribution (RMD): the minimum annual withdrawal mandated from certain tax‑deferred retirement accounts once the account owner reaches specified ages.
– Lump‑sum distribution: a single, full cash payout instead of multiple installments.
– Deed of distribution: a legal document used to transfer property when a will does not clearly name beneficiaries.

How distributions work — the mechanics
– From funds: Mutual funds and ETFs collect dividends, interest and gains from their holdings. Periodically they allocate (distribute) those amounts to shareholders. When a fund pays a per‑share distribution, the fund’s NAV drops by roughly that per‑share amount because the cash leaves the fund.
– From stocks and bonds: Corporations pay dividends to shareholders; bond issuers pay interest and may return principal. Some companies offer dividend reinvestment plans (DRIPs) that use the cash to buy additional shares instead of sending cash.
– From investment trusts: Trusts typically distribute income (often monthly or quarterly). Yields can be higher than ordinary stocks; distributions can affect the trust’s taxable income.
– From retirement accounts: Withdrawals from tax‑deferred plans (traditional IRAs, 401(k)s, 403(b)s, 457 plans) are treated as distributions and generally taxed as ordinary income. Roth account distributions are typically tax‑free if rules are met. Many tax‑deferred plans require RMDs starting at specified ages.

Tax and timing implications
– Ex‑dividend and settlement: If a fund or stock pays a distribution, there is an ex

-dividend date, record date and payable date. The ex-dividend date (or ex-date) is the first day a buyer of a security is not entitled to a recently declared distribution. To receive the distribution, you must buy the security before the ex-dividend date. The record date is the date the issuer checks its books to see who is eligible; because trades take time to settle, the ex-date is set so buyers who own the security by the record date are properly recorded. The payable date is when the issuer actually sends payment (or credits reinvested shares).

Worked example — stock dividend and settlement
– Company X declares a $1.00 per-share dividend, with a record date of Thursday, April 10, and a regular settlement cycle of T+2 (trade date plus two business days).
– The ex-dividend date will be two business days before the record date: Tuesday, April 8.
– To receive the dividend you must be long the stock at the close of Monday, April 7; buying on April 8 or later will not qualify.
– On the morning of April 8 the stock’s market price typically opens lower by about $1.00, reflecting the outgoing cash (market forces and other factors can alter the actual move).

Mutual funds, ETFs and NAV adjustment
– For open‑end mutual funds, distributions reduce the fund’s net asset value (NAV) by the amount of the distribution on the payable date. For example, a mutual fund with NAV $12.00 that pays a $0.40 per‑share distribution will show an NAV near $11.60 after the distribution.
– If you elect dividend reinvestment, the fund uses the distribution to buy additional shares (or fractional shares) at the post‑distribution NAV.
– ETFs trade like stocks, but their market price and NAV can diverge intraday; an ETF distribution will also reduce NAV and typically the market price will move to reflect the payout.

Types of distributions and key tax consequences
– Ordinary dividends: paid from earnings and profits; generally taxed as ordinary income, but may be “qualified dividends” (see below).
– Qualified dividends: meet IRS criteria for preferential long-term capital gains tax rates (holding period and issuer rules apply).
– Capital gains distributions: mutual funds and ETFs that sell appreciated securities may distribute net realized capital gains to shareholders; these are reported separately for tax purposes and may be long‑term or short‑term.
– Return of capital (ROC): a distribution that exceeds the fund’s or company’s current and accumulated earnings is a return of part of your invested principal. ROC is not taxed immediately as income; instead it reduces your cost basis in the investment. When you eventually sell, that lower basis increases your capital gain (or reduces your loss).
– Nonresident withholding: dividends paid to nonresident aliens may be subject to U.S. withholding tax (commonly 30% unless a tax treaty specifies a lower rate).

Worked example — return of capital and cost basis
– You bought 100 shares at $50.00 each (basis = $5,000). A fund pays a $2.00 per‑share distribution classified as return of capital.
– The $200 ROC reduces your cost basis to $4,800 (new basis per share = $48.00).
– If you later sell for $55.00 per share, your taxable gain uses the reduced basis: gain per share = $55.00 − $48.00 = $7.00.

Measuring yields and returns
– Dividend yield (simple): annual cash dividends per share divided by current share price. Example: $2.00 annual dividend / $40.00 price = 5.0% dividend yield.
– Distribution (or trailing) yield for funds: typically the sum of distributions over the last 12 months divided by current NAV or market price. Different providers may calculate slightly differently.
– SEC yield (for bond funds): a standardized yield calculation intended to reflect a fund’s annualized income after expenses, based on holdings and recent income; it’s not the same as trailing distribution yield and is meant for comparability among funds.

Practical checklist before a distribution date
– Check the declaration: ex‑date, record date, payable/distribution date, and amount per share.
– Confirm settlement cycle for the security (most U.S. equities are T+2).
– Decide whether to take cash or enroll in a dividend reinvestment plan (DRIP).
– Review tax classification (

Review tax classification (qualified vs. non‑qualified dividends; ordinary income vs. capital gains; and return‑of‑capital). Confirm how distributions will be reported for tax purposes (e.g., Form 1099‑DIV in the U.S.), and estimate withholding obligations for foreign investors.

Additional checklist items
– Check broker rules: confirm how your broker handles ex‑dividend entitlements, settlement timing, and DRIP enrollment/cancellations. Some brokers require DRIP enrollment well before the record date.
– Foreign withholding tax: if the issuer is foreign, confirm withholding rates and whether a tax treaty reduces them. You may need paperwork (e.g., Form W‑8BEN for U.S. brokers).
– Options and early exercise risk: for American‑style call options, an ex‑dividend can increase the chance of early exercise by holders who want the dividend. If you write (sell) calls, know your assignment risk around the ex‑date.
– Record keeping: track tax lots, reinvested shares, and dates. Reinvested dividends affect cost basis and future capital‑gain calculations.
– Calendar effects for funds: mutual funds and ETFs typically reduce NAV on the distribution date by the distribution amount; large capital‑gain distributions often occur near year‑end.

Step‑by‑step: what to do in the days around a distribution
1. Verify the announcement (declaration) for ex‑date, record date, payable (pay) date, and amount per share.
2. Confirm you hold the shares through the record date (or at least through the ex‑date, per settlement rules) so you will be eligible. Remember U.S. equities typically settle T+2 (trade date plus two business days).
3. Decide cash vs DRIP: if enrolled in a dividend reinvestment plan (DRIP) you will receive additional shares (often fractional); otherwise you’ll receive cash. Update enrollment before the broker’s cutoff.
4. Calculate expected cash: shares owned × amount per share = gross distribution.
5. Anticipate price impact: expect the share price or fund NAV to fall roughly by the distribution amount on the ex‑date (market forces and taxes can alter the exact move).
6. After payment, update your tax and cost‑basis records reflecting either cash received or additional shares purchased.

Worked numeric examples
Example 1 — Single stock cash dividend
– You own 100 shares at market close $50.00. Company declares $0.50 per share dividend payable in one week.
– Gross cash you will receive = 100 × $0.50 = $50.00.
– On the ex‑date the stock often opens roughly $0.50 lower. If it opens at $49.50 and you keep the shares, your account value immediately ≈ 100 × $49.50 + $50.00 = $5,000 (ignoring intraday moves and taxes).
– If the dividend repeats quarterly, annual dividend = $0.50×4 = $2.00; trailing dividend yield = $2.00 / $50.00 = 4.0%.

Example 2 — DRIP (reinvested dividend)
– Same position: 100 shares, $0.50 dividend, stock opens ex‑dividend at $49.50.
– Cash dividend = $50.00. Reinvestment price = $49.50 (market open example). Shares purchased by DRIP = $50.00 / $49.50 ≈ 1.0101 shares.
– New total shares = 101.0101. Cost basis increases by $50.00 (plus any commissions). Track the date and per‑share cost for future tax lots.

Example 3 — Mutual fund trailing distribution yield
– A fund paid distributions totaling $1.20 over the last 12 months. Current NAV = $25.00.
– Trailing distribution yield = $1.20 / $25.00 = 4.8%.
– If the

the fund pays that $1.20 distribution in a single cash payout today, the NAV will fall by about $1.20 on the payable date. Example (100 shares):

– Pre‑distribution: 100 × $25.00 = $2,500.00 total value.
– Cash distribution: 100 × $1.20 = $120.00.
– Post‑distribution NAV ≈ $25.00 − $1.20 = $23.80; value of 100 shares = 100 × $23.80 = $2,380.00.
– Total value after distribution = $2,380.00 (shares) + $120.00 (cash) = $2,500.00.

If you use a DRIP (dividend reinvestment plan) and reinvest that $120.00 at the new NAV ($23.80), you buy 120 / 23.80 ≈ 5.042 additional shares and end up with ≈105.042 shares. There is no economic gain or loss at the moment of distribution — the account shifts from share value to cash (or additional shares if reinvested).

Key concepts and formulas (short cheat‑sheet)
– Trailing distribution yield = (sum of distributions paid over past 12 months) / current price or NAV. Example:

Example: trailing distribution yield
– Suppose an ETF has a current NAV (or market price) of $50. Over the past 12 months it paid distributions that sum to $2.50 per share.
– Trailing distribution yield = (12‑month distributions per share) / (current price) = 2.50 / 50 = 0.05 = 5.0%.

Other common yield measures
– Forward (or indicated) yield = (expected annual distributions per share) / (current price). This uses management guidance or the most recent periodic distribution annualized. Example: last quarterly payout was $0.30; annualized = 0.30 × 4 = $1.20; forward yield = 1.20 / 50 = 2.4%.
– Yield-to-worst or yield-to-maturity applies to fixed‑income vehicles and is beyond basic distribution yield — it accounts for principal repayment and timing.

Key distribution types (short definitions)
– Ordinary dividend: cash or stock paid from a corporation’s earnings and profits (taxed as ordinary income unless “qualified” — see tax section).
– Qualified dividend: an ordinary dividend that meets IRS holding‑period and source rules and is taxed at lower capital‑gains rates.
– Capital gains distribution: mutual funds and ETFs that sell holdings for a gain may pass those gains to shareholders.
– Return of capital (ROC): a distribution that is not paid from earnings; it reduces the investor’s cost basis in the investment rather than being immediately taxed as income.

Worked example: return of capital and cost‑basis adjustment
– You buy 100 fund shares at $20.00 each; cost basis = 100 × 20 = $2,000.
– The fund pays a $1.00 per‑share distribution that is classified as ROC (not taxable when distributed but reduces basis).
– New cost basis = $2,000 − (100 × 1.00) = $1,900 → new per‑share basis = $19.00.
– If the fund later distributes another $1.90 per share in ROC, basis would fall to zero; any further ROC would be treated as capital gain when distributed. (Consult a tax advisor for specifics.)

Dividend timing: declaration, record, ex‑dividend, payable (step‑by‑step)
1. Declaration date: company or fund announces the distribution (amount and key dates).
2. Record date: the date on which you must be on the issuer’s books to receive the distribution.
3. Ex‑dividend date: typically the business day before the record date under T+2 settlement; buy the security on or after the ex‑dividend date and you will NOT receive the forthcoming distribution.
– Example (U.S., T+2): If the record date is Friday, Sept 10, the ex‑dividend date is Wednesday, Sept 8. To receive the distribution you must buy by market close on Tuesday, Sept 7.
4. Payable date: when the cash or shares are actually paid.

Payout ratio (for stocks)
– Payout ratio measures the share of earnings paid out as dividends: payout ratio = (dividends per share) / (earnings per share).
– Example: earnings per share (EPS) = $3.00; dividend per share (DPS) = $1.20 → payout ratio = 1.20 / 3.00 = 40%.

Practical checklist for investors when a distribution is announced
– Confirm distribution type: ordinary, qualified, capital gains, or ROC.
– Check the key dates: declaration, ex‑dividend, record, payable.
– Calculate immediate pricing impact: for funds, expect NAV to drop by

the distribution amount on the ex‑dividend date (i.e., NAV_new ≈ NAV_old − distribution). For stocks, share price typically falls roughly by the declared cash dividend on the ex‑dividend date.

More checklist items and practical notes
– Confirm tax classification. Distributions may be: ordinary dividends (taxed as ordinary income), qualified dividends (taxed at lower long‑term rates if holding‑period rules are met), capital gains distributions (long‑ or short‑term capital gains), or return of capital (ROC, which reduces cost basis). Check the fund’s press release and later Form 1099‑DIV.
– Check reinvestment options. If you’re enrolled in a dividend reinvestment plan (DRIP), distributions buy additional shares — the cash doesn’t hit your account but your share count increases. Reinvestment price = NAV (funds) or market price (stocks) at the time of reinvestment; that sets the new cost basis.
– Anticipate tax timing and reporting. Mutual funds and ETFs report distributions on Form 1099‑DIV the year they’re paid. Keep records of distribution dates, amounts, and any ROC adjustments for tax basis calculations.
– Nonresident and backup withholding. Foreign investors and certain US accounts may face withholding on distributions. Verify account tax status and any required forms (e.g., W‑8BEN).
– Adjust yield and performance calculations. Use total return (price change + reinvested distributions) to compare investments. Trailing‑12‑month (TTM) yield for funds sums the last 12 months’ distributions and divides by NAV; understand whether yields are quoted gross or net of fees.
– Watch for special tax events. Year‑end capital gains distributions can be large if a fund realized gains; buying just before the ex‑distribution date to capture a large year‑end distribution can create an immediate tax liability without fundamental benefit (a “dividend capture” trap).

Step‑by‑step: how to evaluate a newly announced distribution
1) Read the announcement for the distribution type, amount per share, declaration/ex‑dividend/record/payable dates, and whether it’s a cash or stock distribution.
2) Estimate immediate price/NAV impact: subtract the distribution per share from current price/NAV to get a rough ex‑date level.
3) Determine tax treatment: ask the fund/provider what portion (if any) is qualified dividend, capital gain, or ROC; plan for taxes accordingly.
4) Decide reinvest vs. cash: calculate how many shares you’d buy in a DRIP and the cost basis implications.
5) Keep documentation: save the announcement, transaction confirmations, and later 1099‑DIV info for tax reporting.

Worked numeric examples (assumptions stated)
– Fund NAV drop (cash distribution)
Assumption: Fund NAV = $25.00; declared distribution = $0.60/share; you own 100 shares.
Calculation: NAV_new ≈ 25.00 − 0.60 = 24.40. You receive cash 100 × 0.60 = $60.
Net portfolio market value immediately after ≈ 24.40 × 100 + 60 = $2,500 (same as before).
– Stock ex‑dividend price change
Assumption: Stock trades at $50.00; cash dividend = $0.50/share.
Approximate ex‑date price = 50.00 − 0.50 = $49.50 (market forces may move price otherwise).
– Return of capital (tax basis adjustment)
Assumption: You bought 100 shares at $15.00 (cost basis = $1,500). Fund pays ROC = $1.00/share.
Action: ROC reduces cost basis by $100 → new cost basis = $1,400. If you later sell all shares for $1,600, taxable gain = $200 (not $100).
– Total return including distributions
Assumption: Buy stock at $50.00, receive $1.00 dividend, sell later at $52.00.
Total return = (price_change + dividend) / initial_price = (52 − 50 + 1) / 50 = 3 / 50 = 6.0%.

Key tax/holding‑period reminders
– Qualified dividend holding period