Dividend Income Update – December 2016

After my first monthly dividend income update, follows of course the second 🙂So, before the month and the year actually end, I wanted to post this update. I guess I simply could not wait. In December I was paid by five different ETF’s. One actually paid dividends twice this month. I think it is some sort of tax reason why the iShares US Preferred Stock ETF pays dividends twice in December and then none in January the following year. Anyhow, those five funds paid me EUR 45.47 and USD 36.79 after tax in dividends. As you know, I simply combine these numbers although they are two different currencies to arrive at my total for the month of 82.26. While I think this is a nice amount it is actually a little bit shy (-8%) of last year’s figure as you can see in the chart below.

dividend-income-update-2016-12

There are multiple reasons for this lower dividend number. First, there were two funds in my portfolio last year that paid dividends in the month of December which I have sold during 2016. Obviously, that would decrease the dividends I received already. To counterbalance that effect, I actually added to two other positions which paid dividends to me this month as well as twelve months ago. So the absolute dividend number went up for both of those funds. Unfortunately, both of them actually cut the dividend per share. The iShares UK Dividend ETF paid EUR 0.18 last year and only 0.10 this year. I find this quite disappointing. The same goes for the iShares US Preferred Stock which I already mentioned above because it paid me twice this month. It also did that last year but again the per share number is actually lower than last year. It was USD 0.41 in 2015 and only USD 0.33 in 2016.  Of the remaining three funds that paid me dividends one Global X kept its dividend stable while the other lowered its dividend as opposed to this month last year. The only raise was the Delta Lloyd Select Dividend Fund which raised its dividend from EUR 0.05 then to EUR 0.08 now. However, I sold this position recently for other reasons. The table below shows you what was going on per fund that paid me last year and this year.

dividend-income-update-2016-12-per-fund

While the dividend reductions are disappointing, it does not necessarily mean the same as when a company cuts its dividends. Investopedia.com for example says that dividends received by a mutual fund are paid out to the owners of the fund on a pro rata basis. So far so good. This actually sounds pretty similar to what companies do. However with companies you typically buy the shares you purchase in that company from other shareholders who want to sell. Companies issue or buyback shares typically not on a daily basis. Funds however do exactly that. When I want to buy a new share of iShares ABC ETF, they themselves or a liquidity provider for iShares creates those shares for me. Also, an ETF will only pay in dividends whatever they received themselves from the companies the ETF invests in. Say the ETF only receives dividends in May. Subsequently the number of shares available in the ETF increased a lot because of a lot of people buying that ETF, then the dividends the ETF received per share in that ETF actually decline. A small example might illustrate this better. Let’s say iShares ABC manages USD 100 and that it invests in only one company called 123 Corp. 123 Corp paid 5 in dividends to iShares ABC in May while iShares ABC pays dividends once a year in July. Let’s also assume that iShares ABC had 1 share outstanding in May which is worth USD 100. In June, a second investor buys one share in iShares ABC for 100. iShares creates and sells one of those shares for this new investor. Now, iShares ABC manages USD 200 and the fund has 2 shares outstanding at a price of 100 each. However, they only received 5 in dividends in May. So, this 5 will be split over two shares in July when the ETF passes on the dividends it received. What sounds like a 50% drop as opposed to the situation a year earlier when there was just one share of iShares ABC ETF outstanding, is actually the consequence of iShares being successful at selling their funds. Therefore, I am not that worried about those cuts. The cuts could of course also be due to lower dividend income received by the fund. In that case it would be more severe.

How do you look at dividend cuts and what do you think of how I described the dividend fluctuations of ETFs? How was your month of December?

Disclaimer: None of the content of this site is to be considered investment advice. Readers have to form their own opinion about which investments are right for them and take full responsibility for their own actions.

 

6 thoughts on “Dividend Income Update – December 2016

  1. Still, a solid showing from a passive income perspective even if it was a little lower year over year. Distributions from funds are not as easily calculated as from a “traditional” stock and I wouldn’t consider them the same as a dividend. But, to answer your question about a dividend cut, I still hold on to the shares if I believe the company hasn’t changed fundamentally. I held on to my GE, WFC and IR when they cut during the financial crisis and I am happy I did. If I think something has drastically changed with the business and the industry has changed, I’d sell but it’s a tough decision nonetheless. Thanks for sharing.

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    • Hi DH,
      thank you very much for your comment. I agree that fund distributions work different to how they work at companies. Nevertheless, I do consider them dividends as well. I even pay the same tax on them, unfortunately. Even though the dividend particularly from my UK dividend ETF was lower year over year, I plan to hold on to it. I might even add to that position in a few months or so. First, I will write another post on an addition to another position.
      Thanks for stopping by.

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  2. Hi DIB,
    The important thing is that you’re building a foundation so I think it’s all good in the long-term.

    I don’t really worry about fund distributions too much. I did get lower than expected distributions from VIHAX, but haven’t looked into why it was lower as it could simply be currency related. I don’t think there was a massive amount of inflows to the fund but they did announcement a purchase fee so perhaps there was.

    I wonder if the UK dividends were a little lower in 2016 because they were artificially boosted towards the end of 2015 to avoid the incoming dividend tax changes for 2016?

    Best wishes,
    -DL

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    • Hi DL,
      Thank you very much for your comment. I was actually not aware of dividend tax changes in 2016 in the UK. That could certainly have had an impact.
      Currencies might have played a role as well however I suspect it would not explain the drop from EUR 0.18 to EUR 0.10 in dividends per share.
      Thank you very much for your mental support. I’m indeed trying to build that foundation for years to come.
      Thank you for stopping by and all the best to you and your partner in 2017!

      Like

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