Dividends and Capital Gain Distributions Information & FAQs (2024)

A mutual fund dividend is income from dividends and interest earned by a mutual fund’s holdings. Dividends that a fund earns must be paid to shareholders at least once per year.

A mutual fund distribution is derived from net capital gains realized from the sale of a fund's investments and income from dividends and interest earned by a fund's holdings less the fund's operating expenses.

Tax law requires that mutual funds pay substantially all net investment income and net capital gains to their investors, who may elect to receive cash or reinvest in additional shares of the fund.

A fund has realized net capital gains when realized gains on the sale of its portfolio assets exceed realized losses. A mutual fund generally does not pay taxes on realized net capital gains, but instead distributes these gains to shareholders who then include them on their individual income tax returns. These gains are classified as long or short-term gains and are taxed differently. A gain on the sale of an investment owned for one year or less is considered short-term for federal income tax purposes and is taxed as ordinary income. A gain on the sale of an investment owned for more than one year is considered long term for federal income tax purposes.

Shareholders -- except those in tax-sheltered accounts such as Individual Retirement and 401(k) and 403(b) accounts -- are required to pay taxes on distributions, whether the distributions are paid out in cash or reinvested in additional shares. Long-term capital gain distributions are taxed at long-term capital gains tax rates; distributions from short-term capital gains and net investment income (interest and dividends) are taxed as dividends at ordinary income tax rates. Ordinary income tax rates generally are higher than long-term capital gains tax rates.

A mutual fund generates capital gains and income for shareholders in two ways -- by selling investments that have increased in value and by earning dividends and interest on its investments.

Our basic buy and hold philosophy helps limit the amount of gains realized in any period. However, while taxes are an important consideration, securities will be sold when it is appropriate for investment reasons.

For tax purposes, you may see on your 1099-DIV the following items:
Long-term capital gain distributions, which are the net long-term gains realized from the sale of securities. Capital gain distributions come from long-term gains resulting from the sale of securities held for more than one year and are taxed at long-term capital gains tax rates.

Ordinary dividends, which are derived from (1) dividends or interest the fund earns on its investments and (2) net realized short-term gains from selling securities held one year or less. These are taxed at ordinary income rates.
(NOTE: Unrealized gains on investments that have increased in value but have not yet been sold are reflected daily as part of a fund's net asset value.)

Yes. Capital gains and dividend distributions will reduce the fund's net asset value per share (NAV) by the amount of the distribution on the ex-dividend date. For example, if a mutual fund were to pay a distribution of $1.00 per share and the fund's net asset value (NAV) was $10.00 per share prior to the distribution, on the ex-dividend date the NAV would be reduced by $1.00 per share. Market activity may also impact the fund's NAV on the ex-dividend date, so the total change in a fund's NAV may be more or less than the dividend.

No. Distributions do not impact total return. Although the NAV drops when the distribution is paid, shareholders who reinvest their distributions also receive more shares.

There are no tax consequences to shareholders or to the fund if a distribution is not required. The fund's net asset value and its investment performance would remain the same. Shareholders will not be required to pay taxes if the fund has not made a taxable distribution.

Shareholders are responsible for paying taxes on distributions they receive each year, whether they receive the distributions in cash or reinvest them in additional shares of the fund. The funds report distributions to shareholders on IRS Form 1099-DIV at the end of each calendar year. Certain types of fund accounts, such as Individual Retirement and 401(k) accounts, are tax-advantaged. Therefore, shareholders who own these types of accounts pay taxes, if any, on fund distributions only when money is withdrawn from the account and will receive different IRS reports.

The dates explained below determine the timing of dividends and distributions and the customers who are eligible to receive them:
Record Date: All shareholders of record at close of business on this day are eligible to receive the payment.
Ex-Dividend Date: The date on which the per share amount is deducted from the fund's net asset value per share. The ex-dividend date is generally the business day after the record date.
Payment Date: The fund pays customers their proportional shares on this date. For the Nicholas Funds, the payment date is normally the same business as the ex-dividend date, except for those funds with daily income distributions.