How do mutual funds make me money?

Question

Let's say I have a mutual fund priced at $25. They pay a $5 dividend. The value of the mutual fund goes to $20 and I get 0.25 of a share. So, I now have 1.25, which is worth $25.

Does this help me make money somehow or am i being hurt by the dividend? Does this impact the compounding somehow?

Answer 1

You unfortunately are being robbed by taxes on the dividends. You have to pay federal, state, and local taxes on that $5 dividend which causes your initial $25 value to be reduced by the amount of the taxes.  

Answer 2

www.mfea.com

Answer 3

Dividends don't hurt you, they can increase overall returns, esp in down markets. Over time compounding your return by reinvesting the dividends back into the fund or stock has been a good idea by historic standards such as with the S&P 500 Index.

Keep in mind that dividends are not guaranteed; they can be reduced by a company who is in financial trouble and can't afford to pay it. In this case, the stock will get pounded (fall in price) as investors flee in concern about the financial condition of the company more so over what the dividend is.

Large established companies (except for financials right now for the most part) tend to increase their dividends each year ever so slightly such as GE.

Increasing the dividend rate each year or periodically is believed to communicate to investors  that the business is doing well that it can afford to use more of its cash profits and pay shareholders, that it has enough money to invest back in the business.