Dividends and Distributions Deep Dive: What are they and why do they matter?

by Verve

Welcome to our comprehensive resource on understanding how dividends work in Verve Money! If you’ve ever wondered about the benefits of dividends and distributions, how they can help you achieve your financial goals or the art of reinvesting dividends, you’re in the right place. 

In this article, we’ll unravel the mysteries of dividend distributions and the powerful strategy of reinvestment. Whether you’re a seasoned investor or just starting your financial journey, this article will provide you with valuable insights into making the most of your investments with Verve Money.

First up, what’s a dividend?

A dividend is a distribution of a portion of a company’s profits to its shareholders. When a company makes a profit, it may decide to reinvest those profits back into the business or pay a portion of the profit to its shareholders in the form of a dividend. Dividends are usually paid in cash, but they can also be paid in additional shares of stock or other forms of property. 

What’s a distribution?

A distribution refers to the payment made to investors from the income or capital gains generated by an investment fund, including a managed fund, like Verve Money Fund, and an Exchange-Traded Fund (ETF).

Ok, now what’s the difference between a dividend and a distribution?

Dividends and distributions are similar in that they both represent a share of the income earned by a company or an investment fund. However, there are key differences between the two.

If you invest in a company directly, say via the Australian Securities Exchange (ASX), you are considered to be a shareholder of the company, and you may be entitled to receive dividends if the company earns a profit. Dividends are typically distributed to shareholders in the form of cash payments or additional shares of stock, and they represent your share of the company’s profits.

On the other hand, if you invest in a managed fund or an exchange-traded fund (ETF), you are considered to be an investor in a fund that is in turn invested in a number of different companies and assets. This means you can benefit from the dividends paid by all the companies and assets held within the fund or ETF. The income earned by the fund or ETFs investments is in turn distributed by the fund or ETF to investors in the form of a distribution.

It’s important to note that the receipt of dividends and distributions may have different tax implications. Therefore, it’s essential to understand the specific characteristics of dividends and distributions in the context of your investments. 

Why are they beneficial?

Dividends and distributions can be considered “good” for investors for several reasons, depending on each investor’s objective of investment, financial goals, and risk tolerance. Here are some key benefits of dividends and distributions:

  1. Steady Income: Dividends and distributions may provide investors with a regular income stream, as they’re generally paid on a quarterly or annual basis. This income can be particularly attractive to investors who are seeking a reliable source of cash flow, such as retirees who rely on their investments to supplement their retirement income.
  2. Passive Income: Dividends and distributions allow investors to generate passive income without actively selling their investments. This can be especially beneficial for individuals who prefer a more hands-off approach to managing their investments.
  3. Long-Term Growth: Reinvesting dividends and distributions can contribute to the long-term growth of an investment portfolio. Through a process known as compounding, reinvested dividends can lead to exponential growth over time, as both the initial investment and the accumulated dividends generate additional returns.
  4. Risk Mitigation: Companies that consistently pay dividends or funds that consistently make distributions, often have more stable financial profiles. A history of dividend payments can be an indicator of a company’s financial health and management’s confidence in its future prospects. This can provide a degree of risk mitigation for investors, as dividend-paying companies tend to be more selective and disciplined in their capital allocation.
  5. Inflation Hedge: Dividends and distributions can act as a hedge against inflation. While the purchasing power of fixed-income investments like bonds can erode over time due to inflation, dividend and distribution payments have the potential to grow, helping investors maintain their purchasing power.
  6. Discipline and Patient Investing: Investing to receive dividend and distribution payments encourages discipline and patient investing. Investors who focus on dividend-paying stocks or distribution-paying funds often adopt a long-term perspective, which can help them avoid making impulsive decisions

It’s important to note that not all companies pay dividends, not all funds pay distributions and that sometimes dividend and distribution payments might be irregular. Past performance is not a reliable indicator of future performance. You should consider all factors when making investment decisions, such as the company’s growth potential, financial stability, and valuation.

Does Verve Money pay dividends?

No, Verve Money Fund* does not pay dividends. As a managed fund, Verve Money may make a distribution payment to investors from the income or capital gains generated by the fund. Read on below to learn how. 

*Note: Any income distributions are paid annually and will be reinvested in full back into additional units. This will increase the value of your investment. You can withdraw the amount of any distribution that has been automatically re-invested into units by making a withdrawal request. Just be aware that this decision may have tax consequences for you.

How do distributions work in Verve Money?

At the end of each financial year, Verve Money determines if a distribution is payable to investors in the Fund. 

You are eligible for a distribution payment from the Fund if you hold units at the Distribution Date (usually 30 June).  

If a distribution is payable, Verve Money investors will receive a distribution statement for each investment option where they have active holdings in the Fund as at the end of the financial year. 

To find your distribution statement in the app:

  • Log in to your account
  • Click on the ‘Profile’ page of your dashboard
  • Select ‘Statements & Documents’ 
  • You can download applicable statements in relation to your investment options 

Note: You can also view distributions made into your account by reviewing Recent Transactions under your Goal details screen listed as “Distributed earnings.”

It’s important to note that Verve Money automatically reinvests all distributions payable to investors*.

*Note: If you leave the Fund before the 30th of June, your portion of the accrued distribution will be included in the redemption amount paid to you (i.e. included in the Unit Price).

Reinvesting distributions can provide advantages such as mitigating market volatility, compounding returns, staying disciplined with long-term investing goals, and potentially saving on fees, making it a beneficial strategy for long-term investors, but more on this later.

How do dividends and distributions help me to reach my investing goals?

Reinvesting dividends and distributions offers several benefits to investors, particularly those with a long-term investment horizon and a goal of building wealth over time. Here are some key advantages of reinvesting:

  1. Compound Growth: As an investor, when you receive dividends that are reinvested back into the company, you are essentially buying more shares of that company with the distribution payout. It’s a similar situation if you’re invested in a managed fund or ETF, in that you are purchasing additional units in the fund. Over time, this can lead to compounding growth, as the new shares or units you acquire generate their own dividends or distributions. As these dividends and distributions are reinvested, the cycle continues, leading to the compounding growth of your investment.
  2. Accelerated Wealth Accumulation: By consistently reinvesting dividends and distributions, you’re growing your investment portfolio and positioning yourself to receive a greater share of any investment returns generated, which can help you reach your financial goals faster than if you were relying solely on capital appreciation or traditional savings methods.
  3. Dollar-Cost Averaging: Reinvesting dividends and distributions helps you practice dollar-cost averaging, which involves investing a fixed amount of money at regular intervals, regardless of market conditions. This strategy can help smooth out the impact of market volatility and potentially reduce the average cost of investing over time.
  4. Automatic Investing: Dividend and distribution reinvestment is a form of automatic investing. Automatic reinvestment eliminates the need for you to make regular investment decisions and helps you stay consistent with your investment strategy.
  5. Maximizing Total Returns: Reinvesting dividends and distributions can contribute significantly to the total returns of your investment portfolio. In some cases, the cumulative impact of reinvested dividends can account for a substantial portion of an investment’s overall return over the long term.
  6. Long-Term Focus: Dividend and distribution reinvestment encourages a long-term perspective on investing. By focusing on the gradual accumulation of shares and units, investors may be less likely to be swayed by short-term market fluctuations. 

Keeping your ‘future you’ in mind

Dividends and distributions play a pivotal role in shaping your investment journey. They offer the potential for long-term growth and risk mitigation. The choice to reinvest can set you on a path of compounding returns, effectively multiplying your wealth over time. 

With Verve Money’s commitment to helping you reap the benefits of distributions, you have the opportunity to align your investment strategy with your financial goals. Remember, reinvesting isn’t just a financial strategy; it’s a commitment to your future financial success. As you explore the possibilities within Verve Money, keep in mind that every distribution reinvested is a step closer to achieving your aspirations. Happy investing!

This article is published by Verve Money Pty Ltd (ABN 71 653 669 366, AFS Representative No. 001294184), a Corporate Authorised Representative of True Oak Investments Ltd (ABN 81 002 558 956; AFSL 238184), as the Manager of Verve Money. A friendly reminder that all the financial information contained in this article is general in nature and does not take into account your personal financial objectives, situation or needs. It’s important to do your own research and consider getting in touch with a professional adviser to access specific information tailored to your unique situation.

You should read the Product Disclosure Statement, Investment Guide, Target Market Determination and Financial Services Guide before making a decision to acquire, hold, or continue to hold, an interest in the Verve Money Fund. Visit www.vervemoney.com.au/documents to view these documents.

Interests in the Verve Money Fund (ARSN 662 622 899) are issued by Melbourne Securities Corporation Limited (ACN 160 326 545, AFSL 428289). When considering financial returns, return of capital is not guaranteed and past performance is not indicative of future performance.

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