Mutual Funds that pay dividends versus capital gains?

Hello, I am new to investing. I started a Roth IRA and selected some mutual funds that seemed to have safe steady returns. I noticed one of them pays capital gains instead of dividends. What is the main difference? What does that fund do with the dividends it generates if they don't pay them to the investors?
 

MasterOfCoin

Experienced member
1,228 478
Hello, I am new to investing. I started a Roth IRA and selected some mutual funds that seemed to have safe steady returns. I noticed one of them pays capital gains instead of dividends. What is the main difference? What does that fund do with the dividends it generates if they don't pay them to the investors?
They pocket them.

Ditch the funds.
Register with a low fee stockbroker.
Buy Dividend paying stocks.

You'll be a lot better off then paying funds charges and commission for doing the same thing.
Plus you'll get to choose what stocks to invest in.

Basically, cut out one of the markups between you and the market and be better off for it.

💰 💰 💰
 
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1nvest

Well-known member
310 109
Hello, I am new to investing. I started a Roth IRA and selected some mutual funds that seemed to have safe steady returns. I noticed one of them pays capital gains instead of dividends. What is the main difference? What does that fund do with the dividends it generates if they don't pay them to the investors?
They reinvest them into the fund
lets say within a fund, the fund holds microsoft, and microsoft is paying a dividend
the type of mutual fund will say its either accumulating or distributing
accumulating means they reinvest into the mutual fund, being able to buy more stock of microsoft
distributing means you get the dividend. it can be a passive type of income
if you want capital growth, your best best is an accumulating mutual fund. if you want income, then choose a distributing
 

MasterOfCoin

Experienced member
1,228 478
Whilst what 1nvest says is true enough, you'll nevertheless be better off for doing the same thing yourself.

As to re-investing dividends, companies prefer you to do this rather than take the cash, and that being so, will always offer their shareholders a commision-free re-invest dividends route that converts any dividends into additional stock.

But, by all means, pay the middle man, if this is easier for you.

;)
 

McQuant

Member
71 80
They pocket them.

Ditch the funds.
Register with a low fee stockbroker.
Buy Dividend paying stocks.

You'll be a lot better off then paying funds charges and commission for doing the same thing.
Plus you'll get to choose what stocks to invest in.

Basically, cut out one of the markups between you and the market and be better off for it.

💰 💰 💰
Well, this seems to be reasonable advice.
However, the main advantage of funds or ETFs over individual investing is portfolio diversification. Buying individual dividend stocks is fairly expensive even with a low-cost broker. The fund allows an investor to own proportional "share" on many companies and so diversify the portfolio this way. Furthermore, the fund usually tracks some benchmark e.g. S&P 500 or invests into sectors (meaning many companies with a similar line of businesses). Try to invest proportionally into constituent companies, it will cost you a fortune.
That being said, there is a partial solution to this particular problem consists of fractional shares investing. E.g. IBKR allows doing so (only in US companies though). Hence everybody can buy 0.01 shares of Berkshire Hataway ;)
 
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