Dividends And TSP
A question we often hear is whether or not TSP investors receive dividends. The short answer is yes but not in the same way you receive dividends in a brokerage account.
What Are Dividends?
Dividends are a portion of a company's profits that are paid out to its shareholders. Think of them as a reward or bonus for owning a piece of the company.
Here's how they generally work:
Companies earn profits: Businesses generate revenue and hopefully, profit.
Board of Directors decides: The company's board of directors determines whether to distribute a portion of these profits as dividends and how much.
Dividends are paid per share: The dividend is usually announced as a specific dollar amount or percentage per share of stock. If you own 100 shares of a company that declares a dividend of $0.50 per share, you'll receive $50.
Payment types: Dividends are most commonly paid in cash. However, they can also be paid as:
Stock dividends: Instead of cash, shareholders receive additional shares of the company's stock.
Other property: Though less common, dividends can also be distributed in other forms of property.
Payment frequency: Most dividends are paid on a quarterly basis, but some companies pay monthly or annually.
Dividends In TSP
In the TSP (and other tax deferred accounts like 401ks), dividends are incorporated into the share price. From TSP.gov:
Share price calculation
"The value of your TSP account is determined each business day based on the daily share price and the number of shares you hold in each fund.
At the end of each business day, after the stock and bond markets have closed, the total value of the funds’ holdings (net of accrued administrative expenses) is divided by the total number of shares outstanding to determine the share price for that day.
Your earnings (that is, the increase or decrease in the value of a fund) in the TSP and other similar defined contributions plans (e.g., 401(k) plans) are not considered taxable income (but rather, tax deferred) under the Internal Revenue Code. Interest, dividends, capital gains, and/or tax deferred contributions are not taxed until you withdraw money from your plan. There is no need for you to report dividends and capital gains separately for your tax-deferred accounts.
BlackRock Institutional Trust Company, N.A., and State Street Global Advisors Trust Company manage the index funds in which the F, C, S, and I Funds are invested, and credits interest and dividend income each business day. This income is then reflected in your TSP’s share prices.
The daily change in your TSP’s share prices reflects all investment income (interest on short-term investments, dividends, capital gains or losses, and securities lending income) net of TSP administrative expenses."
Because dividends are incorporated into the share price of the fund each day, there is no way to determine the exact dividend of each TSP fund. We can approximate each fund's dividend by looking at the dividend for Exchange Traded Funds (ETFs) that track the same indexes as each TSP fund.
Below are the ETFs that correspond to each TSP fund and their respective dividends.
C Fund (SPY): 1.22%
S Fund (VXF): 1.20%
I Fund (old) ( EFA): 2.75%
F Fund (AGG): 4.0%
The Impact On A Price Chart
The goal of each TSP fund is to mirror the daily percentage move, either up or down, of the index the fund tracks.
When we look at a price chart of the index, the dividend is NOT factored in. When we look at a price chart of the actual TSP funds, the dividend IS factored in.
Depending on the value of the dividend, there can be a significant difference in the way the chart looks. The bigger the dividend, the more distorted the TSP fund chart will look compared to the chart of the index it tracks.
The best example of this is the F fund which tracks the Bloomberg U.S. Aggregate Bond Index.
The weekly chart of the Aggregate Bond Index (AGG) below is Dividend Adjusted. Dividends are included in this chart. While not exact, it is a very close representation of the current price chart of the F fund.
This chart shows that price has recovered all but 7% of its losses since the peak in July 2020.
In contrast, the same chart NOT dividend adjusted is very different! The price of the Aggregate Bond Index needs to gain 22.5% to get back to its former 2020 high. More importantly, the price pattern of the two charts is VERY different.
The dividend adjusted chart above shows a solid uptrend since the 2022 bottom with higher highs and higher lows. The non-dividend adjusted chart below shows a flat consolidation since the 2023 peak and price currently rolling over.
While both charts are valuable to understand, technical analysts focus on the NON dividend adjusted chart. The inclusion of dividends distorts the supply & demand dynamic that the price chart is designed to represent.
Bottom Line
1. Dividends in a brokerage account are generally paid quarterly and they are a taxable event. Dividends in TSP, and other tax deferred accounts, are incorporated into the share price and are not taxable events at the time they are added into the price.
2. The bigger the dividend, the more of an impact on the share price of the TSP fund vs the index that the TSP fund tracks.
3. TSP investors using technical analysis to make reallocation decisions should utilize the NON dividend adjusted chart of the index. Chart distortions caused by the inclusion of dividends can have a big impact on the chart pattern.
The best of all worlds is a high dividend, with the index it tracks in an uptrend.
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GrowMyTSP.com does not provide personal investment advice. We are an education and analysis service, helping TSP investors grow their accounts using strategies and models that best fit their personal circumstances and risk tolerance. Get started at GrowMyTSP.com.
