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The Arguments For and Against Dividends
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A fund’s realised profit can be distributed as dividends.Assume that you own 10,000 units of Dynamic Equity Fund, and the NAV of Dynamic Equity Fund is RM0.52. The value of your investment is:Value of your investment:

= 10,000 units x RM0.52

= RM5,200

Dynamic Equity Fund declared a RM0.02 dividend for each unit. The dividend you are entitled to is:

Your dividend

= 10,000 units x RM0.02

= RM200

After declaring the RM0.02 dividend, the NAV of Dynamic Equity Fund will be adjusted down by the same amount. Thus, post-dividend, Dynamic Equity Fund’s NAV would be RM0.50.

Value of your investment:

= 10,000 units x RM0.50

= RM5,000

If you add the value of your investment (i.e. RM5,000) with the cash dividend that you received (i.e., RM200), you will get back the same value of your investment prior to receiving the dividend (i.e., RM5,200).

Investors will have two options for the dividend from the unit trust. The first option is to receive it in cash, as shown in the example earlier. The second option is to re-invest the dividend into Dynamic Equity Fund. Re-investment means that the RM200 will be converted into additional units in Dynamic Equity Fund.

Remember that after the dividend, the NAV of Dynamic Equity Fund will be RM0.50, instead of RM0.52. The units that you will receive from re-investing the dividend would be:

Re-investment units received:

= RM200 ÷ RM0.50

= 400 units

Value of your investment:

= (10,000 + 400) units x RM0.50

= 10,400 units x RM0.50

= RM5,200


The Arguments For and Against Dividends

I personally believe that the issue is not with the unit trust declaring dividends, but the misinformation that investors have in regards to dividends.

For instance, using the same Dynamic Equity Fund example earlier, when Dynamic Equity Fund declared a dividend of RM0.02 per unit when the NAV was RM0.52, investors view that they are receiving a dividend yield of 3.85% (i.e. RM0.02 ÷ RM0.52). However, as shown earlier, since the NAV will be adjusted downwards to reflect the value of the dividend, investors are not getting additional “return”. The value of the investors’ investments pre- and post-dividend remains the same.

This is different from returns from fixed deposits. For fixed deposits, if the interest rate is 3.85%, investors will get an additional 3.85% return on top of the amount that they had put in.

Does this mean that it is meaningless for unit trusts to declare dividends?

Not really, as the declaration of dividends by unit trusts can have the advantages of:

  1. Allowing investors to realise part of their investments in unit trusts into cash without needing to redeem units; and
  2. If the investors chose to re-invest the dividend, the investors will receive more units without needing to incur any sales charge.
  3. Reducing the NAV, so that investors will have higher number of units in their subsequent investments.

Thus, it does have merits for unit trust funds to declare dividends. However, bear in mind that dividends for unit trust funds can only be declared from [1]. realised profits, and [2]. dividends received by the fund from its investments. The chase after dividends will result in the unit trust fund needing to constantly dispose of shares to realise profits, which may not be in the best interests of the unit holders in the long run.

Why do we say so? The unit trust fund could have invested in a very good company at a very early stage and be sitting on high unrealised profit currently. The fund manager may want to continue to hold on to the investment as the prospects could still be bright. However, if the unit trust decided to declare dividends, the fund manager might need to sell the positions that are profitable in order to realise the profit. Thus, this might result in the fund no longer holding that investment.

Some may argue that the fund can subsequently buy back the position. Yes, this may be true. But the cost would be different (A good thing if lower than the disposed price, but not so good if higher). Not to mention there will be transaction costs involved, both in the selling and the subsequent buy-back.


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