Which trackers pay dividends?
|Investment | Trackers
Asked by hdeakin299, submitted
11 January 2011.
I have a knowledge gap about trackers and dividends: I do know that some trackers include dividends and some do not and my questions relate to this aspect.
- Is there a way to tell which trackers do include income?
- Are income paying trackers a very specialist area or are they fairly easy to find and generally available?
- Is there a generic category or name for these income providing trackers or are they referred to simply as income paying trackers?
- Is the income ever paid out or does it simply accummulate within the fund?
Answered by Justin on 12 January 2011
Most tracker funds pay income provided the underlying investments generate dividends or interest. For example, if you buy a FTSE 100 tracker fund you'll receive dividend income, whereas an exchange traded fund tracking the gold price doesn't because gold bars don't produce an income.
But there are exceptions. Protected plan type investments (which typically pay returns based on stockmarket movements over 5 or 6 years) don't normally pay dividend income and neither do most funds that offer leveraged exposure to an index. This is because they're built from artificial financial derivatives rather than actual shares - so there's no natural dividend unless the fund incorporates this using yet more derivatives.
To check whether a tracker fund pays income and, if so, how much, just take a look at its factsheet (which should be available from the provider's website). If it quotes an income yield then this is broadly what you can expect based on recent prices. It should also confirm when income is paid, if relevant.
When funds pay an income there's usually an option to have it automatically re-invested. This can happen one of two ways. A fund may offer 'income' ('inc') units with the income payment being used to buy further units in the fund. Or it may also offer 'accumulation' ('acc') units whereby the unit price increases to reflect the income that would otherwise have been paid out.
For example, suppose a fund is priced at 100p and makes an income payment of 5p. If you own £100 of income units you'll receive £5 of income, which can used to buy an extra 5 units. Had you owned accumulation units your holding would remain unchanged, but the unit price will have increased to 105p, valuing your stake at £105.
Income producing funds invariably offer income units with most having an accumulation unit option too. Note: accumulation units don't allow you to avoid tax, you still have to pay any income tax owed on income distributions even though they're not physically paid out.
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