Vanguard VWRP accumulating ETF - dividend question

[Deleted User]

What happens to dividends for ETFs like VWRP that are accumulating? From what I can tell the dividend doesn't get reinvested back into additional shares, so do they buy more underlying stock and increase the share price?
Cheers!

bowlhead99

The fund receives various dividends from the portfolio of companies it holds, pretty much every week of the year. So, you 'benefit' from the dividends, which more than cover the cost of running the fund and there is spare income left over.  However, the VWRP class of shares does not distribute the money, and simply reinvests it back into more shares of the companies in the index it tracks.

If you used a share class that pays out dividends like VWRL, then when the shares go ex-dividend it means the value of the share drops because it's being sold ex (without) the right to the next dividend.  Whereas if you used VWRP, it doesn't drop, because they are never going to pay you out a dividend.

So relatively speaking, the share price has increased in VWRP. Of course, it may not actually go up, because there may be a general crash in share prices and it might go down instead, but the value of a share is higher than if they had used some of the ETF's cash to pay you out. Instead, they just buy more shares in Microsoft, Apple, etc etc.

As with other non-UK domiciled ETFs which are registered with HMRC as 'reporting funds' in the UK's offshore fund reporting regime, they produce a report once a year to say how much net income they generated each year that they didn't actually pay out, and instead allocated as a notional dividend once per year, after the year end. You can use that report to multiply by the number of shares you held and work out whether you owe any dividend tax on the dividend income (even though you chose not to physically receive it, you still benefited from it). And the amount of notional dividend you earned is a qualifying cost when you calculate your capital gains tax on disposal (because it is as if you had manually reinvested the money into new investments in the fund, even though the quantity of shares you own in the ETF itself hasn't risen).

Obviously that last bit about tax isn't relevant if you hold it in an ISA or pension.

Sheriff_Fatmen

Obviously that last bit about tax isn't relevant if you hold it in an ISA or pension.

It was a useful reminder for me to avoid ETFs in my unwrapped portfolio as far as possible, so thanks for that. I dont wish to be spending my evenings doing too much of that. 

Sebo027

bowlhead99 said:

The fund receives various dividends from the portfolio of companies it holds, pretty much every week of the year. So, you 'benefit' from the dividends, which more than cover the cost of running the fund and there is spare income left over.  However, the VWRP class of shares does not distribute the money, and simply reinvests it back into more shares of the companies in the index it tracks.

If you used a share class that pays out dividends like VWRL, then when the shares go ex-dividend it means the value of the share drops because it's being sold ex (without) the right to the next dividend.  Whereas if you used VWRP, it doesn't drop, because they are never going to pay you out a dividend.

So relatively speaking, the share price has increased in VWRP. Of course, it may not actually go up, because there may be a general crash in share prices and it might go down instead, but the value of a share is higher than if they had used some of the ETF's cash to pay you out. Instead, they just buy more shares in Microsoft, Apple, etc etc.

As with other non-UK domiciled ETFs which are registered with HMRC as 'reporting funds' in the UK's offshore fund reporting regime, they produce a report once a year to say how much net income they generated each year that they didn't actually pay out, and instead allocated as a notional dividend once per year, after the year end. You can use that report to multiply by the number of shares you held and work out whether you owe any dividend tax on the dividend income (even though you chose not to physically receive it, you still benefited from it). And the amount of notional dividend you earned is a qualifying cost when you calculate your capital gains tax on disposal (because it is as if you had manually reinvested the money into new investments in the fund, even though the quantity of shares you own in the ETF itself hasn't risen).

Obviously that last bit about tax isn't relevant if you hold it in an ISA or pension.

Interesting...

dales1

Sheriff,

Don't necessarily avoid ETFs simply because of the tax twists.

It does take BH a sentence or two to fully describe the situation. But it's only once a year, and the actual process is quite easy once you've understood it. It actually takes just a few minutes, not a few evenings ! Rest easy.

Dales.