TOPICS
TOPICS
Disappearing Dividends
Let's solve a mystery about the Thrift Savings Plan: What happens to the dividends earned from stocks in the TSP funds?
Dividends are a share of company earnings paid out to investors. They are declared by a company's board of directors and are often paid quarterly.
The reason TSP participants never see dividends on their statements even though some of the funds earn them, is they are automatically reinvested into holdings. So the fund's value increases, but the dividends' contribution is hidden.
The TSP is the federal employee version of a 401(k) retirement savings plan. Not all the funds are composed of publicly traded stocks. In fact, the five stand-alone funds in the plan get their earnings from a blend of sources.
Only the common stocks (C) fund, the small- and mid-sized companies (S) fund, and the international stocks (I) fund make part of their earnings from dividends. The rest of the earnings for the C and S funds are derived from fluctuations in the market value of the stocks making them up. I Fund earnings stem from both these factors and from changes in value of American currency relative to foreign currency.
The government securities (G) fund's earnings are derived solely from interest, paid by the U.S. government. The fixed-income (F) fund's earnings come from changes in market prices as well as interest. Neither of those funds have any dividends.
The earnings of the F, C, S and I funds are reduced by administrative costs (which are the lowest anywhere, by a wide margin) and management costs from Barclays Global Investors, which runs the investments. Share prices are calculated after deducting these costs.
Automatic reinvestment of dividends in the TSP means federal employees, perhaps unknowingly, are investing more in their retirement.
Did you ever notice that returns on the C Fund are sometimes higher than the returns on the Standard & Poor's (S&P) 500 Index, which the C Fund tracks? That's because the S&P 500 does not include reinvestment of dividends, and the TSP does.
Don't confuse the TSP's system of reinvesting dividends with DRIPs (dividend reinvestment plans). DRIPs are programs where an individual company automatically reinvests dividend earnings for stockholders by providing additional shares of stocks, often with no extra charge.
Thirty years ago, retirees often lived off of dividends alone, keeping their principal intact, according to certified financial planner Karen Schaeffer. Longer retirements make that practice rare today. TSP participants should worry much more about the funds in which they invest, than they should about how those funds make their earnings, Schaeffer said.
"Generally, what we're trying to get people to focus on when we're looking at their investment is not so much the difference between dividends, capital gains and interest, but the difference between what they invest in and what is worth--total return," Schaeffer said. "It's the total return that gives us the confidence that we're keeping pace with, or maybe even staying ahead of, inflation."
COMMENTS
- This article is worthless. Every retirement fund reinvests dividends interest and gain taken into the investment medium. If the TSPer does not know that they should not be trying to make decisions concerning their funds and let the professionals do it. Hey guys, even in your IRAs the dividends and interest are usually reinvested or sit ideal because you do not know what to do with them. I do not want TSP spending my money to calculate and report every dividend, interest, capital gain or loss to report because they are just going to reinvest it anyway. The way you handle this is in the proportion you have in each fund -- rebalance your four funds when they get out of line with the proportions you have set. It is easy to do online and takes very little effort on your part! This article is a disservice to all and highlights TSP as if they were different. A better service this author could provide is to explain why TSP has the same administrative expense charged to the G fund where there is almost no thought or action by TSP is the same as for the C fund where TSP has to decide what to buy and sell, when and how much for each. Also, the cost of a loan is far too low and we are subsidizing the borrowers. Increase loan changes to at least $300 to cover the costs of setting up the loan and servicing the loan over its life! TSP participant Posted January 6, 2006 7:17 AM
- Thanks for an informative article on how the TSP treats dividends. I've always thought it was done this way, but now I know. It's interesting that the TSP adjusts the share value of its funds to account for dividends and interest, but mutual funds pay out dividend and capital gain distributions which create taxable events for shareholders unless the funds are in tax advantaged accounts. Maybe this type of accounting could be a solution for mutual funds so that shareholders don't get slapped with distributions. Or would this take some type of ruling by the IRS? Leonard Norberg Posted December 23, 2005 10:24 AM
