GIPS - dividend accrual

(1) Are dividends considered interest income, or just income? (2) Do they accrue in practice, or is that just what is recommended be done by GIPS? I think the answer to (2) is no b/c they just get paid out as they come due. Not so sure about (1). Thanks.

You are entitled to dividends for several days before they are actually paid out. The idea with accruing under GIPS is that if you are on record to rec the dividend, but it hasn’t paid out yet, it should be reflected in the performance numbers. This is because the stock will immediately drop as of the ex-dividend date (first day the stock trades without the dividend) but you won’t have actually rec the div yet.

For point 2 above: IMO dividend accrual will have to be taken into account when the underlying is sold during the period as opposed to end of the period. For eg. a bond which pays annual dividend is sold after holding it for 6 months. The purchaser will have to compensate the seller with 6 months of dividends which have accrued on the bond. Pls tell me if i’m completely off here…

Accrual of dividends at or after ex-dividend date is recommended but not required.

Magix Wrote: ------------------------------------------------------- > For point 2 above: IMO dividend accrual will have > to be taken into account when the underlying is > sold during the period as opposed to end of the > period. For eg. a bond which pays annual dividend > is sold after holding it for 6 months. The > purchaser will have to compensate the seller with > 6 months of dividends which have accrued on the > bond. Pls tell me if i’m completely off here… Correct but the price of the bond should reflect this.

Thanks everyone. But to my first question, are dividends considered “interest income” or just “income”?

mwvt9 Wrote: ------------------------------------------------------- > You are entitled to dividends for several days > before they are actually paid out. > > The idea with accruing under GIPS is that if you > are on record to rec the dividend, but it hasn’t > paid out yet, it should be reflected in the > performance numbers. This is because the stock > will immediately drop as of the ex-dividend date > (first day the stock trades without the dividend) > but you won’t have actually rec the div yet. I think i was off above. mwvt9’s explanation is the correct one.

lolly Wrote: ------------------------------------------------------- > Thanks everyone. But to my first question, are > dividends considered “interest income” or just > “income”? It isn’t interest income for sure. I am not sure what you mean by income?

Interest = Cash and debt income Dividends = Earnings paid out by firm (not interest)

thanks McLeod. i know that was a ‘duh’ question.

lolly Wrote: ------------------------------------------------------- > thanks McLeod. i know that was a ‘duh’ question. Not really, from the perspective of the average investor dividends and interest are the one and the same.

hey, thanks for bringing it up. i couldn’t figure it out either. i guess it’s time between ex-dividend and dividend payment… anyway, the concept is so obvious. but they didn’t explain it (schweser at least)

there is a bit diff betw int and div. int accrue to the lender (tax deductible, usually) and div accrue to the shareholders (after accounting for int income and exp). recall the FCFF and FCFE at level 2. div will be paid out of FCFE after int an debt payments (equity shareholder)

what are is an example of a non-fixed income secy that pays interest income and that would need to be accrued under GIPS? McLeod81 Wrote: ------------------------------------------------------- > Interest = Cash and debt income > > Dividends = Earnings paid out by firm (not > interest)

lolly Wrote: ------------------------------------------------------- > what are is an example of a non-fixed income secy > that pays interest income and that would need to > be accrued under GIPS? Hmmm… not that I think this has any bearing on the exam, but what about a fixed-income ETF? While the ETF pays “dividends,” it is really distributing interest income. Would it have to accrue the interest? I would think not since as a buyer you would not owe the seller the accrued interest, that is handled by the dividend record date and, as described above, the price would adjust down when it goes ex-dividend. Can’t really think of anything else right now, but I wouldn’t get too hung up on this point. Accruing interest: required. Accruing dividends: recommended.

I think I saw swaps and forwards referred to somewhere as securities that accrue interest income (I can’t imagine how this can be used unless the payments are in arrears, like an IR cap). Anyway - as sterling said - main point is dividends recommended, interest income required.

i think people are mixing up a bunch of stuff and them/curriculum make it confusing… basically the one poster had it right (i think), when a stock goes ex-dividend, the shareholders don’t get paid the cash for awhile. so the performance analysts will give the portfolio credit for the dividend receivable and then eliminate it when the cash is paid the more obvious example is when buyer pays the interest and it isn’t in the basic price… not true about a high dividend paying stock. dividend is always in the price or you don’t have rights to it.