Q.: I just got a $7,000 dividend from a mutual fund that usually only pays small dividends and is now only worth about $62,000. At first, I thought that was great, but the fund has dropped in price and now I am wondering what happened. Can you shed some light on it?First, whenever a stock or a fund pays out a dividend, the value of the holding is adjusted down. Say you gave $1 to a co-worker, your net worth just dropped by $1. The same thing happens when a company pays a dividend.
You got a $7,000 distribution and the fund dropped $7,000 which aligns with the basic mechanism I just described. $7,000 is a lot and unusual so my suspicion is that it is not a standard dividend but a distribution of capital gains. This is the time of year that these distributions are typically made. Most fund families have published the record dates, ex-dividend dates, pay dates and estimates of the amounts of capital gain distributions. If you have large holdings in a taxable account, or intend to buy a fund soon, it is a good practice to review these potential payouts so there are no surprises when you file your tax return.
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