Vanguard VDY : very low dividend payment on Feb 8th, anyone knows why?

There is an Open Discussion Thread but people insist on starting new threads for every little question.

Anyone knows why?

First, do not interchange the word dividend and distribution. This leads to many confusions people may have about this. For instance in this case, you are assuming because it is the same as a dividend, it must be related to the dividends paid by the companies it holds. The biggest thing I tell people is it technically has nothing to do with it.

Distributions are just movement of of cash processed by the fund as the managers see fit. How the fund processes cash depends on the rules it set for the fund (can be read in the prospectus) and management decision.
As a unit holder of VDY, you can almost think of the fund like a company. The manager is a CEO of the fund and they make decision accordingly.

When you look at the cashflow statement of VDY, you can see where they make money and what is happening to their cash pile...

Vanguard Annual Cash Flow Statement wrote:

As you can see cash goes in and cash goes out. Depending on what is happening, the money is distributed as they see fit. When you see VDY's history, it is all over the place....

VDY distributions 2022 wrote:

This seems to be management just deciding when it is best. When you read the prospectus and the fund's objective and investment strategy (found in Vanguard's prospectus), you can see that distributions in itself is not part really a part of the fund's prospect. It's main objective is to follow a Dividend Index (yes dividend ETFs can technically still be index funds), and not necessarily provide steady income.

Vanguard Prospectus wrote:

Vanguard VDY Investment Strategy wrote:

All it states it will do is try to replicate a Canadian dividend index

Compare this to the BMO Canadian Dividend ETF Objective (ZDV)

BMO Simplified Prospectus wrote:

BMO's dividend ETFs have been designed to provide high and steady income so that there is little variation. The fund manager therefore keeps the cash distribution somewhat steady.
You can see this in their distribution history...

BMO wrote:

Other than some capital gain realization in that December, they purposely make the distribution somewhat the same. They probably make sure the cash they have can cover their buys, sells, expenses etc.

Now here is the opposite spectrum. Let's look at Horizons Canadian High Dividend Index (HXH). Here is the fund strategy according to the prospectus.

Horizons wrote:

The big thing I want you to see is they do not mention distributions/income whatsoever. But at the same time, notice how it says it is replicating the Solactive Total Return Index. The total return index is a dollar amount assuming all returns including if companies had paid dividend are represented in the index number. This is different from say an S&P 500 Index where this is the stock price value. S&P500 Total Return Index also exists which is essentially accounting for the dividends stocks would pay.

And this is further stated by the qualities management describes their fund with...

As a result...

Because there is no data/distributions.

In other words, distributions are dependent on the fund's strategy and management with dealing with cash. You can see that a name of the fund doesn't tell you exactly what is occurring and it is important to read into the fund's prospectus and material to see what they are doing with the fund. It is advisable to then read other companies. While ETFs sound the same across, often times they are not and people find themselves very confused. I won't go into too much detail with other funds, but another example is Manulife Smart Canadian Dividend (CDIV). This pays distributions quarterly. They've decided it shouldn't be monthly. It may be that doesn't make a huge difference return wise, but think of a retiree trying to create cash flow during retirement. If you were to tell a retiree, just pick a dividend fund so you have income, depending which of the above are picked can cause issues for that person.

So the reason why VDY has a really low distribution in February? We don't know. But we know that they don't seem to care when cash goes out. I think they just probably set some rule (have to have so and so much cash held and any excess of that is paid out etc.) and hence why the distributions are often decimal points. But it goes to that fact that people often don't research funds you invest in. A lot of information can be gleaned by reading Fund prospectuses before buying. If Vanguard had wanted to, they could change the fund's structure so the distribution is more even every month, but since this isn't highlighted in the fund objective, they have no need to do this, although I am sure they can do so. I mean it makes sense that it could be varied. Considering most companies pay dividends monthly quarterly, the cash coming into the fund will be different because they get different dividends each month. Also remember they might have less cash if people sold a ton of units.

Key takeaways

-Dividend Funds don't necessary mean they pay out all the dividends it receives from dividend companies. Rather they invest in dividend-paying companies with a strategy they choose.
-Dividend Funds are also technically index funds in many cases.
-Distributions (not dividends) are paid out according to the fund's objective or how the managers have seen fit. They arent necessarily flat rate, but on the cash the fund has access to.
-It is important to read fund prospectuses and see annual reports to fully understand what goes on in your investment.

EDIT:
If I was to guess with VDY..
-December we saw stocks fall, so likely there was a lot of unit sells and not as much people investing into VXY

Morningstar.ca wrote:

-To provide cash to those who sold, cash is used to pay out these units
-There wasn't any capital gains distributions, so some likelihood manager didn't sell stock, meaning less cash to work with
-So January, they probably decided to hoLd cash, or their management rule they set internally shows they have less cash to payout

xgbsSS wrote: ↑ Key takeaways

The first key takeaway I see is that you made an amazing post with a ton of effort. You included screenshots and explanations all along the way. Awesome job, I am sure the poster is able to learn quite a bit from you.

BMO Distributions... wrote:

Jokes aside... if you need more even monthly distribution of income (you rely on the distribution monthly/get "satisfaction" monthly), ZDV might be a better strategy for you than VDY

Wow, thank you xgbsSS.
You never fail to impress me with your willingness to help fellow forum users.

I did use wrongly the term dividend. I am aware of the volatility of the monthly distributions, I have VDY in my portfolio since 2019.

What you taught me here is that VDY distributions are much more disconnected from the underlying companies dividends than I tought.

This was a very good in depth answer to the question I had, I learned.
Cheers.

The dividend is low anyways because the fund is so overvalued. Money market has a higher yield.

kilburn305 wrote: ↑ The dividend distribution is low anyways because the fund is so overvalued. Money market has a higher yield.

Fixed your statement.

A fund's distribution yield like explained above has more to do with the fund structure and cash holdings of the fund rather than the economic environment. In addition for stocks, dividend yields really have anything to do with prevailing interest rates. Some equities like utility companies, REITs or preferred shares can act like bonds and move with interest rates, but you cannot value a stock based on the yield of dividend alone. In other words, likely as stocks sold in December and less money went into the fund, and the fund manager didn't sell stock to realize capital gains, the fund had less cash to pay out.

Equity functions in terms of valuation of the company, and it's assets. Argument on whether the fund is overvalued should be based on the NAV of each unit, or the stocks it holds. You might argue the stocks it holds might be overvalued, but you cannot translate that to a fund being overvalued. Currently, the market price of VDY is $43.95 and the stated NAV as of yesterday is $43.94. That isn't overvalued. Besides, how do you explain other similar investment funds like ZDV with a consistent yield?

ARKK got so popular that it's price was higher than the NAV on multiple occasions. That is an example of overvalued fund.

xgbsSS wrote: ↑ Fixed your statement.

A fund's distribution yield like explained above has more to do with the fund structure and cash holdings of the fund rather than the economic environment. In addition for stocks, dividend yields really have anything to do with prevailing interest rates. Some equities like utility companies, REITs or preferred shares can act like bonds and move with interest rates, but you cannot value a stock based on the yield of dividend alone. In other words, likely as stocks sold in December and less money went into the fund, and the fund manager didn't sell stock to realize capital gains, the fund had less cash to pay out.

Equity functions in terms of valuation of the company, and it's assets. Argument on whether the fund is overvalued should be based on the NAV of each unit, or the stocks it holds. You might argue the stocks it holds might be overvalued, but you cannot translate that to a fund being overvalued. Currently, the market price of VDY is $43.95 and the stated NAV as of yesterday is $43.94. That isn't overvalued. Besides, how do you explain other similar investment funds like ZDV with a consistent yield?

ARKK got so popular that it's price was higher than the NAV on multiple occasions. That is an example of overvalued fund.

Its a dividend fund, thats why you buy it im assuming. Yield matters when the overnight rate is now 4.5 %.

I would want atleast a 6% yield for the risk.

kilburn305 wrote: ↑ Its a dividend fund, thats why you buy it im assuming. Yield matters when the overnight rate is now 4.5 %.

I would want atleast a 6% yield for the risk.

Yeah that's not what you should be buying stock for. Dividend stocks can function to provide income, but they are equity based. The valuation comes from price increase in stock price and dividend income. It can serve to provide equity exposure that is traditionally more stable than growth stocks, while providing some income buffer.

Additionally, as demonstrated above, the yield on the fund depends on whether the money is retained (meaning the unit goes up in price to reflect the cash) or it pays out (cash is paid out as income). It becomes effectively the same thing. You cannot base "safety" or "risk" on the yield paid out.

xgbsSS wrote: ↑ Yeah that's not what you should be buying stock for. Dividend stocks can function to provide income, but they are equity based. The valuation comes from price increase in stock price and dividend income. It can serve to provide equity exposure that is traditionally more stable than growth stocks, while providing some income buffer.

Additionally, as demonstrated above, the yield on the fund depends on whether the money is retained (meaning the unit goes up in price to reflect the cash) or it pays out (cash is paid out as income). It becomes effectively the same thing. You cannot base "safety" or "risk" on the yield paid out.

I get what youre saying. But I have charts and in this case i think its valid to compare this bond proxy to the overnight rate.

kilburn305 wrote: ↑ I get what youre saying. But I have charts and in this case i think its valid to compare this bond proxy to the overnight rate.

Respectively disagree. A fund may retain cash which means you cannot compare it based on yield alone.

I noticed this same thing for VRE, though it got a balloon payment last month.
Thinking of moving to XRE...

Some news, distribution has been corrected (I almost wrote dividend, ouf! )

https://ca.finance.yahoo.com/news/corre ... 00094.html

DeckardN6 wrote: ↑Some news, distribution has been corrected (I almost wrote dividend, ouf! )

https://ca.finance.yahoo.com/news/corre ... 00094.html

haha, you shall feel my wrath

Quentin5 wrote: ↑ I noticed this same thing for VRE, though it got a balloon payment last month.

In case you don't know how to handle that "balloon payment", it is a reinvested capital gains distribution, also known as a phantom distribution. They happen when the fund reinvests capital gains instead of paying them in cash. The amount will be in included in the capital gains amount on your T5. They typically get issued with a record date of late December and a payment date in early January. Since these are reinvested distributions, you should add the amount to your ACB, otherwise you will end up paying taxes twice, once in the year they are received, then again when you sell.

Phantom Distributions and Their Effect on Adjusted Cost Base

Deepwater wrote: ↑ In case you don't know how to handle that "balloon payment", it is a reinvested capital gains distribution, also known as a phantom distribution. They happen when the fund reinvests capital gains instead of paying them in cash. The amount will be in included in the capital gains amount on your T5. They typically get issued with a record date of late December and a payment date in early January. Since these are reinvested distributions, you should add the amount to your ACB, otherwise you will end up paying taxes twice, once in the year they are received, then again when you sell.

Phantom Distributions and Their Effect on Adjusted Cost Base

I did wonder what about that capital gain, though it apparently does me no good in a TFSA.
There was a large dividend as well, more than triple December.