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|Subject: Re: What To Do With A Large Cash Amount?||Date: 9/5/1999 5:23 PM|
|Author: TchrP||Number: 13666 of 73987|
>> Maybe I'm confusing growth and return. Is that the case?
You may be confusing income and return.
Income from stocks is the amount paid in dividends. It represents a share of the company's profits that the company chose to distribute to the shareholders. Not all companies pay dividends, even if they are making a profit.
Mutual funds must distribute income received from their underlying investments at least once a year.
Mutual funds must also distribute the capital gains that they realized. Gains represent growth in the value of the underlying investments, but they only have to be distributed by the fund when they are "realized," meaning that the fund sold the underlying investment and took the profit.
So a mutual fund will often distribute three kinds of earnings in a year: income, short-term gains, and long-term gains.
Gains that the fund did not yet realize -- that is, where the fund continues to hold the stock -- aren't distributed. Instead, they are included in the net asset value of the shares. If you redeem your shares, the increase in the net asset value is also a capital gain.
All four of these things -- income dividends, distributions of short-term gains, distributions of long-term gains, and unrealized gains -- constitute total return.
Thus, it is entirely possible for a fund to have income dividends of (just as an example) 1% while having annual total return of more than 10%. This is quite different from a bank CD that might pay 5% interest and have absolutely no change in value, with the result that the income yield and the total return would be identical.
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