“It pays dividends” – This is a fairly common saying which means that there will be a reward if we put a lot of effort into an activity or purpose. However, depending on the particular activity, it is not always possible to visualise these rewards even though they may not be abstract. A good example of this is the dividends paid by Accumulation stock market index funds.
Accumulation class funds do not directly pay out dividends to the investor as opposed to Income class funds which distribute dividends as a direct cash payment to the fund investor. Instead, dividends for accumulation funds are rolled up and automatically reinvested in the fund, resulting in an increase in the price of the stock.
Even if this automatic process is an efficient, hassle free and reasonable way to grow one’s portfolio over time, the lack of visibility may make it seem as if little or no progress is being made. Most investment platforms do not have a way of showing what happens with these dividends and minimal information is available elsewhere.
To overcome this lack of clarity, I recommend regular tracking of dividends and recording the information in a tracker document. The process is quite simple and needs to be carried out once every few months or yearly depending on the dividend dates. Once the results are available it will be possible to identify trends like how much income your investments are producing and the actual dividend yields of index funds. Here is an outline of the steps to use:
Step 1: Find the data for the index fund
For the initial step you can use a investment data provider like Trustnet, Morningstar or your investment platform to analyse dividend and share price history for a particular fund. As an example, I will use the Vanguard FTSE UK All Share Index fund, a fund which tracks the performance of the UK FTSE All Share index. On Trustnet you can find the index you are interested in by selecting its characteristics on the drop-down menus and performing a search as shown below:
Step 2: Analyse historical dividend and share price data
The next step is to analyse the relevant fund data. Trustnet provides a host of information on the fund including tracking error, price, charges, performance charts, top company holdings, sectors, diversification, fund size and dividend history. Explore all tabs to identify these metrics.
However, we are only interested in the information on the Dividends tab. After navigating to the dividends you will be presented with a history of the latest dividends issued by the fund. Useful metrics shown are dividend amount, ex-dividend date and payment date. The dividend amount is the amount paid per share unit of the fund. Ex-dividend date is when the dividend was declared.
Payment calculations are based on how many units were held on the ex-dividend date. Payment date is when the payment is actually made. As shown in the table, the dates occur at regular intervals while the dividend amount varies. A yearly date applies to the fund in our example.
Step 3: Calculate and record actual dividends
The final step is to determine the actual amount of dividends generated by your index funds. To make this calculation use the following formula:
Dividend “paid” = Dividend Amount x Number of units held on ex-dividend date
For example, if 25 units of the Vanguard FTSE UK All Share Index Fund (Accumulation) were held on 1st November 2016, the dividend “paid” on 30th December 2016 will be about £150. It is useful to store all this data for all your funds in an Excel or Google Sheets document for analysis and reference.
Stay the course and keep on investing
Continual tracking of such metrics for index funds makes it a lot easier to visualise the benefits and power of passive investing. The magic of compounding will also be displayed as the regular dividends will grow dramatically from one period to the next, particularly if regular investments are made by paying in new money.
It can be argued that dividends, a guaranteed potential source of passive income, are more powerful than capital growth when it comes to long term investing. Therefore, keeping an eye on dividends will provide the needed motivation and ease the path to financial independence.