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."