1

I'm trying to get a sense for what to (very roughly) expect in terms of bond funds return on investment as compared to a guaranteed investment, like CDs.

Here is an example fund and its reported "after-tax returns" (note: the site states that taxes are computed at the highest possible rate):

Bond fund after-tax returns, sample

I am a little unsure how to read this. Here are some questions about that section, taking them somewhat out of order:

  1. "Returns after taxes on distributions". What are distributions? I'm assuming these are quarterly dividends paid to fund holders? So this is saying that in the past year, fund holders received 3.93% of their investment back in dividends (after taxes)? That is, if one invested $10,000, one would have received $393 in (tax-already-paid) dividends this year?
  2. "Returns after taxes on distributions and sale of fund shares". Is this then the returns considering both the distributions and if one sold off one's entire fund holdings? Since this value is less than just the distributions, that suggests that the value of the one share of the fund has decreased (slightly) in this past year. In fact, that appears to be true for the entire time since inception.
  3. Now then, what would simply "Returns before taxes" mean? Is that, as in question 2, combining both dividends and sale of fund shares and giving the value before taxes?
  4. Is the "Average Intermediate-Term Bond Fund" section there to just have a comparison of this fund with the average out there in the market?

I'm mostly interested in having an alternative to CDs and am probably not suited to active trading of funds, so am looking for something to hold and accrue dividends, so final question:

  1. Is there a way to know what the bond fund is currently paying in terms of dividends, the way a single bond states its "coupon", or is that determined by some market effects, and if so, what are they?
Chelonian
  • 2,197
  • 2
  • 22
  • 26

1 Answers1

2

Ok, to answer, let's stick with the 1 year column. You invested $10K. After a year, your account is worth $10,524. But part of this is dividends you received, which are taxable (if in a non-deferred account, obviously). So after that year, you'll have taxes due and have a total account value of $10393. That's great, but they are saying that part of that number is a gain, and after accounting for the tax, if you cashed out, you'd have $10,343.

Simply put, the "return before taxes" is what you'd have in your IRA if you held it there. The other two figures account for the tax due on the dividends paid out and if you sold altogether.

For a new purchase the fund should state its current yield and its duration.

JTP - Apologise to Monica
  • 172,273
  • 34
  • 296
  • 560
  • I don't understand, possibly two things, so two comments. 1) "But part of that is dividends you received". What's the other part? 2) If you paid taxes on the $524 you received in dividends + that "other part", if you pay taxes again when you cash out, haven't you paid taxes twice on this gain? – Chelonian Oct 28 '11 at 23:15
  • you have an account containing the not-yet-taxed distribution and the shares of the fund you still own. 2) $524 is not all dividends, $524 represent the total gain, part is growth, part distributions received. You must pay the tax on distributions (in taxable account each year) but gains are only recognized on the sale of the fund.
    • – JTP - Apologise to Monica Oct 28 '11 at 23:31
  • So then when you sell the fund and pay taxes on the gains, you are paying taxes only on the gains (that is, the appreciation of the shares), and not any of the portion of the value that is from dividends (because you already paid taxes on them)? Hang with me, it's getting clearer. :D – Chelonian Oct 29 '11 at 16:46
  • Uh, maybe. If the sale occurs in the same year as the dividends/distribution, you'll pay taxes on both, separate lines on your return. If you hold long term, you'll pay tax on the distributions each year and the gain, if any, at the time you sell. Better? (I have a 13yr old, I have all the patience in the world, and happy to clarify for you.) – JTP - Apologise to Monica Oct 29 '11 at 18:54
  • Better. But "the gain" = only from the appreciation of the fund, not the appreciation + the dividends? The whole point is, that these dividends not be taxed as part of the gain as well as being taxed as dividends (that would be taxing that money twice). It sounds like that is what you are saying, that "gain" and "dividends" are never mixed for taxation purposes (even if it is the same year, they are separate lines on the return, as you said). – Chelonian Oct 29 '11 at 20:31
  • Gain = rise in share price for a fund. The other thing is the distributed dividends. (And just to add even more confusion, it's possible for a bond fund that trades within the fund to distribute not just dividends but cap gains as well. Someone was bound to point this out eventually.) Safe to say that what they distribute to you each year is taxed separately from when you sell the fund itself. – JTP - Apologise to Monica Oct 29 '11 at 21:36
  • The non-dividend capital gains happen specifically when interest rates fall. Your fund has a bond which will pay out money on a fixed schedule (interest) and they paid a certain price for it; now they could sell it at a higher price (resulting in a lower interest rate). –  Nov 02 '11 at 00:30