Surprising Mutual Fund Capital Gain Distributions

Tis’ the season of short-term and long-term mutual fund capital gains. This was a surprising trend this year as even some of my index funds paid out some hefty long-term capital gains in December which isn’t a common occurrence.

Of course, it’s not all about capital gain distributions as December is also a great dividend month, my biggest by far. However, even that large number was eclipsed by the various capital gain distributions I received.

I suppose it’s not too crazy given the raging bull market we’ve had but it could be a tax issue for those who hold those in non tax-advantaged accounts. For me, that wasn’t a problem since all of my funds that paid capital gains were in either my 401k, Roth IRA or HSA.

Often these can be confused as dividends especially since even big players like Fidelity can simply label them as dividends in 401k accounts but they’re a bit different and certainly less dependable.

If you’re not familiar with mutual fund capital gains, they’re basically a one-off distribution from the proceeds of sales of stocks that happened within the portfolio. They happen more often in active funds that buy and sell stocks regularly and less often in index funds that don’t do that as often. Still, even index funds sometimes have to sell stocks to buy others as stocks move in and out of indexes and for various other reasons.

If that happens during a big bull market and those sales generate a capital gain, investors can see capital gain distributions from their funds. This is a taxable event so not something investors should love if they’re holding them in taxable accounts especially since they can be a surprise. Mutual fund companies often publish a list of expected capital gains a month or two before the year is through but it can still be hard to prepare for them which can lead to some taxable exposure.

Mutual fund capital gains function similar to dividends in that they reduce the price of the holding by the corresponding amount of the payout and can be used to buy additional shares. They differ in that they are more irregular. Dividends are generally a quarterly thing that can be dependable outside of a market crash or massive dividend cuts while capital gains will only happen after a bunch of in-fund stock sales that generate a profit which cannot be offset with losses from other sales. While they can happen in ETFs, they happen less often as those are more tax-efficient than funds.

On the tracking side, since capital gains aren’t regular and unlikely to be repeated year to year, I track them separately from dividends. Sure, they give me additional shares and increase future dividends which is great but they’ll likely only happen every once in a while so it’s not something to count on regularly.

This has been a big year for them as I’ve already gotten some long term capital gains in June which totaled to $4,216.87. That was a nice boost to the number of shares bought in that month so it’ll be interesting to see what happens this month as December is usually the biggest month for capital gain distributions if you see any.

On the dividend side, as mentioned above, since most of my money sits in ETFs and index funds, December is by far my biggest month. Last year it sat at $4,900.86 so hopefully I can break that $5K mark this year and start setting new monthly records every year!

December Dividends

December’s dividends came in at $5409.31, a 10.4% boost over last year which is pretty sizable growth considering the size of this month.

I was a bit worried about this month as September barely grew over last year but December certainly delivered a good bump to squash those worries. It’s slowing growth given that 2020 grew at 17.7% but I also put a lot less money into the market this year due to health expenses and the expenses that come with buying a home.

The nice thing about these bigger numbers is that the higher they go, the more shares I get with each month’s re-investment. At my current yield, December’s dividends will increase my forward income by $156.87. That’s nothing to sneeze at and really shows how continued investing and re-investing can power future growth due to the compounding effect of those investments.

Since this is December, I can also close out the year with a total of $15,869.11 in dividends, which is a 13.92% boost over last year. It’s nice to see that number increase as it only grew 7.58% the year before due to the various dividend cuts and yield reductions that came in 2020. Again, re-investment here is key as that big number means a forward income boost of $460.20.

It’s crazy to see such big numbers in a year as my dividends in some of these months are buying more shares than I was buying when I first started investing. I’m getting to that point where current dollars re-invested are starting to make a bigger impact than new money going into the market.

Steve, my dividend employee, had himself a nice December as usual and earned a $32.46 hourly wage. If only each month were like this I’d be all set. However, since my other months are much smaller, Steve’s annual hourly wage sits at $7.94/hr. That’s not quite enough for me to live on right now but it’s growing every year at a good clip. Inflation is certainly eating away at those gains and we’ll see how that continues going into 2022.

I’m not concentrating on dividends right now as growing my portfolio is my main goal but as I get closer to my retirement age, I plan to change that strategy up a bit and foresee this number to tick up quicker as I get closer to that quit date.

Mutual Fund Capital Gains

Dividends weren’t the only record here as I garnered $605.42 in short term capital gains and a massive $10,771.13 in long term capital gain distributions..

That’s 11.3k in overall capital gains for the month which boosts my forward income $329.92!

Add that to what I got in June and that brings the overall capital gain distributions for the year to $15,593.42 which all together will push my forward income up $452.21. That’s almost higher than my entire dividend total for the year!

That’s a pretty sweet number and while these aren’t going to repeat, I’ll take the additional shares which should improve my dividend gains in the coming year. It’s always great to re-invest all this money into new shares because it’ll just help my wealth compound across the years.

The good thing about this is that all these mutual fund capital gains were either in my 401k, Roth IRA or HSA so there’s no taxes owed on these. That’s one of the reasons I hold most funds that may have some active management in tax-advantaged accounts. I generally tend towards holding ETFs in taxable accounts as those are a bit more tax-efficient.

While I never really expect these capital gains, they’re certainly a nice surprise. When you combine them with my dividends for the year, it’s over $30k in new shares of funds, stocks and ETFs that will help these numbers in the future.

2021 Dividends YTD

Now that the year is over, it’s nice to look at the full year graph and see the growth I’ve experienced this year.

You can see that my dividends are concentrated in these quarter ending months but it’s the small months that have had the biggest growth on a percentage basis this year. If I ignore March, June, September and December, the other months have grown at a 23% clip year over year and that’s pretty good.

They’re still very small but my contributions to my M1 Finance accounts as well as some purchases of individual stocks that pay dividends are helping those months grow faster and become a bigger piece of the pie.

In fact, while the $5,000+ threshold I hit this month is awesome, I’m also excited about hitting $300 in the off months for the first time and nearing $400 in November. I think 2022 might be the first year where it’s $300 in every month and likely the first $400 off month as well.

I’m hopeful that my spending allows for more investing this year as these dividends and capital gains actually eclipsed what I invested with new money due to all the expenses I had in 2021. That’s not a bad spot to be in but I do have to step it up a bit if I want to retire by 45.

Hopefully, if I can pick it up a bit in 2022, these dividend months can start growing at a much faster clip as the next big target of $20,000 is within sight. I don’t think I’ll hit it this year as that would be a 26% growth rate but it’s certainly worth a try. There’s been a lot of larger than usual dividend bumps from some companies and that might lead to bigger dividend growth going into 22.

Overall, I’m very happy with the results here given the lower than average invested dollars this year. It’s nice to see the portfolio reach a point where growth is somewhat self sustaining as new contributions become less and less impactful and portfolio returns and re-invested dividends start to become the key to future growth.

I’m soon going to be in a spot where my dividends are more than half of my gross income from my first job and that’s pretty darn impressive and really shows the power of time and continued investing.

Here’s to 2022 and more new records and hopefully a bit of a better year for all. 2020 part 3 isn’t really something I want to see.