Investment funds dividend distridution
I think it may be useful to talk a little about dividend distribution in investment funds (and particularly in SICAV, the open-ended collective investment scheme quite common in western Europe). I noticed there are a few common misunderstandings.
First misunderstanding is that some peeople seem to think that dividend are some kind of “gift“. Quite obviously, they surely are not. When the fund detach the dividend, the share price goes down accordingly: for example, if the share price is 52, and then the fund distribute to shareholders 2 as dividend, the share price goes immediately to 50. This is because, in fact, who buys shares before the dividend distribution, purchases the share and the dividend, while who buys after, purchases only the share. Therefore you can consider dividend distribution totally neutral, from this point of view. This is true in particular for SICAV, since NAV value (the price of share) is calculated on the securities in portfolio, and not traded directly (when talking about stocks, things are a little different, since the dividend distribution and the consequent price variation may start some reaction from investors, and therefore it can introduce some distortions)
A second misunderstanding is that, in many cases, dividend distributuion by investment fund is not advantageous. The reason is mainly related to taxes. When you receive dividends, you pay taxes on it (in Italy, 12.5%). If the fund instead did not distribute dividends, also that percentage would be still invested, and therefore able to yeld further earnings.
Moreover, in case of dividend distribution you pay taxes even if you have a loss. For example, if you buy fund shares at 55, and then they go down to 52, and at this point the fund distribute 2 as dividend, you have to pay taxes on this 2 “earning”, even if in fact you have a loss of 3.
For this reasons, in my opinion it may be better to prefer an investment fund that does not distribute dividends.