Fidelity Select Fundranker

Fundranker Blog—Select Fund Dividends

Select Fund Dividends

Many of Fidelity Investments’ Select funds will be paying dividends in April. On what is known as the ex-dividend date, the closing NAV of the dividend-paying fund will be adjusted downward by the amount of the dividend. The fund may gain or lose value on that trading day as well, of course, which also will affect that day’s NAV. Essentially, the fund distributes a set amount per share and reduces the closing NAV of each share by that same amount. You end up with the same value, partly as shares and partly as dividend.

If you automatically reinvest your dividends, the dividend amount is used to purchase new shares at the adusted NAV, so you end up with more shares, but with the same value you would have had without the dividend being paid. Fidelity Investments shows pending dividends for your holdings online at after 4pm ET on the ex-dividend date. The following morning, your accounts will reflect the new number of shares at the new NAV.

If your Select fund holdings are in a taxable account, Fidelity Investments will send you a Form 1099-DIV shortly after the end of the year that shows dividends distributed during the year. They will be classified as ordinary dividends, qualified dividends, and capital gain distributions. Qualified dividends are included in ordinary dividends, but they are broken out because they may be eligible to receive preferential tax treatment. That is, qualified dividends that fall within the 15% tax bracket are not taxed at all, and qualified dividends that fall in the 25% or higher tax brackets are taxed at only 15%.

Unfortunately, until you receive your Form 1099-DIV, you can’t tell how much of your ordinary dividends is eligible to be treated as qualified dividends. When you do receive your Form 1099-DIV, the qualified dividends it lists really are only potentially qualified dividends. You still have to determine if you held the fund shares which paid the dividends for the required periods. You must hold the dividend-paying fund shares for at least 61 days of the 121-day period beginning 60 days before the ex-dividend date and ending 60 days after the ex-dividend date. When you count the days, include the day you sold shares in a fund, but not the day you acquired them. For example, if you acquired shares 60 days before the ex-dividend date, you could sell them 61 days later on the trading day immediately following the ex-dividend date, or if you acquired shares one day before the ex-dividend date, you could sell them 61 days later, which would be 60 days after the ex-dividend date.

Fundranker held a number of funds in 2008 that paid dividends in April and December. Assuming you made exchanges on Fundranker exchange dates, you held all of the Top Eight Model Portfolio funds that paid dividends in April and December the required 61 days, except for two funds that paid dividends in December, 2008: Select Environmental and Select Utilities (then known as Select Utilities Growth). Qualified dividends reported on your Form 1099-DIV for all other Top Eight Model Portfolio funds can and should be reported as qualified dividends on your 2008 Form 1040, which means they qualify for the preferential tax treatment discussed above.

Posted 4/9/09 1:25pm ET in Fidelity Investments, Investing, Tax Tips