Vanguard Life Strategy Accumulation Shares

bowlhead99

lindabea wrote: »

Thank you all for your replies. Sorry for appearing dense, but I can't get my head round this!! In the above example, someone with an inc fund would see no benefit from the dividend because the £200 paid out as a div would reduce the fund value by the same amount. ie net gain = 0. Similarly, someone with an acc fund would also see no benefit from the dividend if the fund value remains the same. So how does an investor benefits from dividends?

The day of a 'dividend payout' to Investors of the fund every 6 or 12 month doesn't actually change your wealth. If the fund has £10200 of assets which it holds on your behalf (cash and investments plus other assets or liabilities) you can choose to use:

- an income version of the fund so that it thrusts £200 of cash dividends into your pocket and continues with £10000 of assets in the fund, or

- an accumulation version of the fund so that the £200 of cash dividends is not paid out but simply spent by the fund on buying more investments so they will continue with £10200 of assets in the fund instead of £10000 of assets in the fund and £200 in your pocket.

In either situation, the fact that they say, "hmm we haven't paid out dividends for a while, let's declare a dividend" doesn't change your wealth when they say that. It doesn't magically create money out of nowhere. If they pay you dividends one day, they can only pay you with your own money - because you are the owner of the fund anyway.

The bit you are missing is the fact that the reason the fund is in a position to have £10200 of assets and consider giving you the £200, when it has started the year at only £10000... is that each day over the course of the whole year they had been earning a few pence or a few pounds of dividend income. They perhaps received in £300 of income from the portfolio investee companies over the year, paid £100 of management fees and operating costs, and were left with £200 of net income. The way you "benefit" as an owner of the find is that your wealth rises from £10000 to £10200 over the course of the year, as a result of that net income received by your fund in excess of its operating costs.

Whether you choose to take that net income as cash dividends back to your own pocket, or simply leave it in the fund to accumulate, doesn't change the fact that your wealth grew from £10000 to £10200.

lindabea

Thanks Bowlhead for your explanation - I think the concept is beginning to sink in!! Thank you all for your patience. Trying to watch 'FLIGHT' now