One of the most frequent questions we get has to do with calculating the performance of our various strategies. More specifically, some people wonder why the returns we report don’t match the numbers they came up with when comparing a fund’s starting and ending net asset values. Invariably, they failed to factor in the impact of a fund’s distributions.
We’ve previously explained how to properly determine a fund’s performance. What I’d like to emphasize with this article is the importance of understanding how your broker is currently treating distributions from funds you own, and if you’d like to make any changes, knowing how to do so.
Your distribution options
There are two main choices. You can have distributions reinvested — that is, the distribution amounts are used to purchase more shares of the funds making the distributions. Or, you can have the distributions, well, distributed. Usually, that means the money is transferred to a cash account at your broker.
For most investors using retirement accounts, we believe it makes sense to have distributions reinvested so that the distributions are used to purchase more shares of the funds making the distributions. That way, the value of your funds is growing to the full extent possible. For investors in taxable accounts, it's generally best to not have the distributions reinvested. This will simplify tax reporting when a fund is sold. (There's more information on this in Chapter 8 of The Sound Mind Investing Handbook.)
Here are some examples of how to see how your distributions are currently being treated and how to make changes at a few of our recommended brokers.
Fidelity. After logging in to your account, you’ll see various tabs, such as “Summary,” “Positions,” and “Balance.” Click on “More” and then “Account Features.” From there, choose “Brokerage & Trading” and then “Dividends and Capital Gains.” There you will see each of your accounts as well as each security you hold and how dividends and capital gains are being treated. To make any changes, click on “Update” and you’ll see your options: “Reinvest in Security” or “Deposit to Core Account.”
If you choose “Reinvest in Security,” each time there’s a distribution that will lower the fund’s NAV while at the same time using the amount of the distribution to buy additional shares of that security. If you choose, “Deposit to Core Account,” each time there’s a distribution, that will lower the fund’s NAV while at the same time adding the amount of the distribution to your cash account.
TD Ameritrade. Once you’re logged in, hover over “My Account” and click on “Dividend Reinvestment.” From there, you’ll see where you can click on “Enroll/Edit” for “Stock & ETF Dividends” as well as for “Mutual Fund Distributions.” After clicking on “Enroll/Edit,” you can click on “Edit enrollments” and make any changes you want.
Vanguard. After logging in, hover over “My Accounts” and click on “Dividends & capital gains.” From there, you can see your taxable and nontaxable accounts. In the top right portion of the screen, click on “change distribution elections.” From there, click on “change elections.” You will then be presented with two drop-down menus—one for dividends and one for capital gains. For each of those, you will be presented with four options: “Reinvest,” “Transfer to a settlement fund” (a money market fund or cash account), “Transfer to a bank account,” or “Send me a check.”
I don’t have access to Schwab or E-Trade, so I can’t describe the steps necessary to check or make changes to distribution choices at those brokers, but I trust they are somewhat similar to the processes described above.
It would be worth investing a few minutes of time to check how your distributions are being treated at your broker and make any desired changes.