What Is Dividend Drag?

Dividend drag is the negative effect of the dividend structure of a unit investment trust (UIT) withou💖t an automatic reinvestment program, whereby investors can'𝔉t immediately reinvest their dividends. There is a time lag between when dividends are issued and when those dividends can be reinvested. If the share price is rising, this time lag can mean the dividends are reinvested at a higher price than if there was no lag.

Understanding Dividend Drag

Dividend drag affects shareholders if they choose to reinvest the dividend themselves, or if they instruct t🌱heir broker to do it.

The structure of UITs delays dividend payments for days, and in a rising market the share price is constantly increasing. Without an automatic 澳洲幸运5开奖号码历史查询:dividend reinvestment (DRIP) option for shareholders, it could take several days for the money to be reinvested. In the meantime, the price of the shares will have increased, and the same amount of money will buy fewer shares than if it had been immediately reinvested.

Dividend lag exists because UITs have more than one participant. With a mutual fund, the mutual fund company can take your dividend and immediately put it back into their fund. They control the process. With a UIT, the pooled assets are usually held with an investment bank, so the dividend passes through an extra set of hands. This increases the time it takes to receive and/or reinvest the dividend.

Some brokers offer dividend reinvestment 🌞plans, while others do not. Whether the plan is offered or not, the structure of the UOT will determine if there is a lag in getting the dividend reinvested or not.🉐

ETFs Without Dividend Drag

Dividend drag is a feature specific to UITs. Today, most ETFs are 澳洲幸运5开奖号码历史查询:open-end management inv🍒est༒ment companies. Like UITs,♏ management investment companies take several days to get dividends into the pockets of shareholders. Unlike UITs, management investment companies can elect to reinvest profits as opposed to issuing a cash dividend, thus eliminating dividend drag.

Manage꧒ment investment companies’ operating costs are higher than those of UITs, but their mutual fund-like structure allows for more flexibility. Investors should assess the quality of an investment in the context of their personal investment philosophy and unique life situa💦tion.

Does Dividend Drag Matter?

While dividend drag is enough for some investors to swear off UITs completely, they remain a popular investment product. In fact, some of the large𝕴st ETFs trading today are UITs. For many investors, dividend drag doesn’t count for much.

Some investors find the net effect of dividend drag, while valid and measurable, still too small to matter, particularly considering all the other factors in evaluating a fund, such as index tracking, exposure, operating costs, and 澳洲幸运5开奖号码历史查询:tax efficiency.

Example of Dividend Drag

Imagine a dividend paid to an 🍰investor of XYZ Trust of $1.56 per share. The investor owns 300 shares and therefore will receive $468 in dividends on the꧋ dividend payment date. The share price on the day the dividend is paid is $240.

The dividends would buy an additional 1.95 shares or units. Now assume that it takes several days to process the dividend and get i🐠t reinvested. The share price of XYZ has moved up to $245. The $468 in dividends now on🌳ly buys 1.91 units.

While this may seem like a small difference, if it happens multiple times, this will reduce performꦺance over time. In thiওs case, the investor paid 2% more for the shares than they would have without the time lag.

The Bottom Line

Dividend drag happens when dividends cannot be immediately reinvestment in a unit investment trust becaℱuse it takes several days for them to become available after they were issued. As a result, if the share price is rising, the dividend can buy fewer shares when it is finally reinvested than it would have on the day it was issued.

A dividend reinvestment plan (DRIP) can help to reduce dividend drag, though there may still be some delay depending on the structure of the fund. In a falling market, when share prices are going down, drag can have a positive impact. The dividend𓃲 is able to buy more shares at the new, lower price than it would have at the old, higher one.