Many mutual funds have dividend and capital gains reinvestment plans. Under these plans, mutual fund shareholders do not take (or keep) their distributions from the mutual fund in cash but, rather, reinvest all the dividends and capital gains distributions received in new shares of the fund. Mutual funds have found that the various reinvestment plans are popular. In some funds as much as 95 percent of the capital gains and dividend distributions made to shareholders are reinvested by the shareholders in additional shares of the same fund.
Many mutual fund underwriters offer automatic dividend reinvestment plans. In an automatic plan, the shareholder does not receive a cash dividend. When declaring a dividend, under such a plan, the mutual fund, or its underwriter, simply notifies shareholders that their dividend has purchased them X number of additional shares. If the investor does not utilize an automatic reinvestment plan, or if the fund of which they are shareholders does not have such a plan, the shareholders can nevertheless usually reinvest their dividends simply by sending the fund the money either directly or through its representatives and by making their wishes known.
Some funds will permit their shareholders to reinvest their dividends in new shares at net asset value per share—in other words, without requiring a sales charge. The net asset value is the market value of all securities held in the fund divided by the number shares held by investors. Other funds, however, require the full customary sales charge on shares purchased by dividend reinvestment. Some mutual funds fix minimum limits on shareholder accounts for which the dividend reinvestment privilege is extended without charge. The policies of each individual fund regarding the dividend investment privilege and other matters can be found in the prospectus.
Under some circumstances dividend reinvestment without the imposition of a sales charge can be a valuable privilege for an investor. The existence of this privilege, or the lack of it, should be one of the factors weighed by investors when they are deciding which mutual fund can best serve their needs. As always, read everything that the fund gives you before investing.
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Bart Ward is the chief executive officer of Ward & Co. Ltd., an Anoka-based registered investment adviser – specializing in the management of stock and bond portfolios in companies which are listed on the NYSE.