Cap div
title: Capital Gains & Dividends description: [AFW S.2.13] Investment Principle #13: Part 2/4 of "Shares" published: true date: 2026-06-30T08:10:17.464Z tags: editor: markdown dateCreated: 2021-08-28T01:32:27.606Z
Watch Shares vs Dollars (all 4 parts) VIDEO
Watch Capital Gains & Dividends Reinvested to Buy More Shares (Shares 2 of 4) VIDEO
Read Nick's This Time Isn’t Different - #11 - Part 1.10 - The Relentless Opportunism of Reinvested Dividends PDF
“We advisors don't talk enthusiastically enough about dividends.
Even when stock prices are running on pure emotion, dividends remain essentially a function of the companies' ACTUAL earnings from their operating business - and managements' best estimate of the future prospects for those earnings.” ―Nick Murray
Though a large majority of clients and Advisors have the re-investment of capital gains and dividends (CG/D) turned on by default, they often don't realize the tremendous benefits.
Automated¶
It's automatic - the client doesn't need to do anything. Just let it happen.
No Cost¶
When the fund's CG/D are used to purchase more shares of the fund, they do so at NAV without any sales charge (regardless of share class).
Down Market Profit¶
CG/D are often declared even when the general market is having a down year. It possible for any given mutual fund to lose paper-value over a year and yet still pay CG/D (the ICA has paid a dividend every years since 1936)!
This can happen when some of the underlying companies within the mutual fund still declare their dividends (ie, they make a profit), even when the general market is experiencing a malaise. Also, if the fund managers sell stock for more than they bought it for, even though the general market is down, that will generate a capital gain.
Now, when those CG/D are reinvested in a down market, what is the relative price of those shares? CHEAP! If a fund pays CG/D in a "down" year then the client will add more shares to their account, at a cheaper price, without making any contributions of their own!
Caveat 1: Embedded Capital Gains Taxes¶
For example a fund might have sold Tesla this year after owning it for a dozen years or more. The manager may have bought it at $10 a share and is now selling at $25. Regardless of when I bought into this fund, for tax purposes I bought in at $10 and now must equally share the tax liability on the realized gains of $15.
If I bought into this fund 2 years ago and only saw a portion of the gains in holding Tesla, I am responsible for all of the taxes associated with the profit realized by the fund manager (relative to my account value verses everyone else who owns this fund).
Answer¶
First of all, this only affects non-qualified accounts.
Now the problem is that there is no viable alternative to mutual funds, all things considered. The taxes are what the taxes are. As Nick Murray says, "Never make investment policy decisions based upon taxes. Anytime you try to reduce taxes by changing the investment you will lose more in total return than you save in taxes". Note: he's not talking about using tax shelters.
Some will claim that ETFs or Separately Managed Accounts have less turnover and thus will have less embedded capital gains, or that they have investment strategies to reduce taxes. This is true, to a degree. I personally have not seen evidence that this is significant, in addition when you take into account the extra cost of these investments compared to a A-share mutual funds the the claimed tax benefits shrink.
Also, the above situation can also a benefit. I can buy a mutual fund December 15 and 2 weeks later collect the dividends and CG! Yes, I pay taxes on it, but it's taxes on "free" money. Also, I realize the share price goes down (see below),
Caveat 2: It's a "Wash"¶
The share price goes down when CG and Div are paid out, and thus the actual account value stays the same. This is called a "wash".
Answer¶
Anecdotally, I've observed that the shares of said funds rise pretty quickly back to their same value before, thus, in fact, increasing the account value to a higher level than before the CG/Div were paid out.
Even if the above does result is a true "wash", meaning the shares don't rise soon and the account value stays the same... I would much rather have more shares at at lower value than the opposite. The name of the game is "share count". For one thing, dividends are paid based upon the number of shares you own, not the value of those shares. And when I retire I want to live off of dividends and CG, and not sell my shares, if possible.
An even better illustration... I invest in a fund in the middle of December and two weeks later have the CG & Div paid out in cash to me ("real money"), but still own the same number shares! In other words, in 2 weeks I got "free" money (minus taxes), and still own the same property!