Impact of dividends on performance reporting

Don't Rely on Average Cost To Assess Performance

Important notes regarding your average cost base on funds when dividends are re-invested:

Be careful assessing the performance of your mutual fund when dividends are re-invested. Most mutual funds pay monthly, quarterly or annual dividends. These dividends lower the unit price of your fund, but give you more units of the fund if you have chosen to re-invest (as 99% of investors do). Thus your fund may drop in price suddenly at the end of the year, and by looking at your fund's cost vs. today's price, you may conclude your fund has not appreciated, even though it has. Don't panic. See the example below:

Date	Price	Shares	Value
March 31	$5	2,000	$10,000
Dec 30	$6	2,000	$12,000	($1 dividend reinvest)
Jan 1	$5	2,400	$12,000

In the example above, your average cost and current unit price are the same at $5, but your fund is up 20%. We are required to calculate cost this way for tax purposes but it can be very misleading to the average investor when trying to evaluate investment performance. Focus instead on your total plan growth to see how your investments are doing. If your fund pays dividends, you can expect your unit price to look like this over time:

An Example

Dynamic Mutual Funds has produced an excellent piece which shows an illustrative example of dividend reinvestment and its impact on share price and returns:

• Dynamic Dividend Example

So how do you assess your fund's performance?

Take a look at the fund's returns with dividends reinvested over a specific time period here, or contact us for a free comprehensive analysis of your fund's performance over various time frames.

Track reinvested distributions in taxable accounts

Don't forget that any reinvested distributions from your mutual funds held outside your RRSP or registered retirement income fund should be added to your original adjusted cost base of the mutual funds. It's easy to forget this, particularly if you're preparing your own tax returns. Keeping track of the new adjusted cost base each year will mean you will avoid a double-tax problem when you eventually sell of your mutual funds.

See the CRA information circular on preparing your taxes on funds. This Tax Reporting Guide from AIM Trimark also has good information.

Where can you get the information on these reinvested distributions? Check the periodic statements you receive. The book value reflected in these statements should be your true adjusted cost base, though its worth double checking the numbers.

More on dividend reinvestment

• Our May 2007 article on Understanding Average Cost
• CRA information circular
• Tax Reporting Guide from AIM Trimark
• Dynamic Dividend Example
• Understanding Distributions from AIC
• Distributions Demystified from TD
• About preferred shares

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