Buying a Dividend: An Open Letter to Wall Street

Dear Investment Community,

We are writing to introduce our company FairShares. We are passionate about creating products that help investors make more money and keep more of what they earn.

We have both good and bad news for anyone who has ever bought a stock or investment fund that pays a dividend.

First, the bad news. If you have ever purchased an investment fund or income-producing security:

1. You paid more for the stock or investment fund than it was worth.
2. Your net worth was reduced immediately upon the purchase, a result of investment funds and income-producing securities accounting for dividends payable to investors as assets, instead of what they are – liabilities. You “bought a dividend,” and you will lose money as soon as the dividend is paid.

Some of you may be reading this with disbelief. You don’t have to take our word for it, “buying a dividend” is disclosed as a risk in every investment fund prospectus. Consider the following text found on BlackRock’s website.

 “Buying a dividend” refers to purchasing a mutual fund just prior to a distribution by that fund. If the fund is held in a taxable account, this generates an unnecessary tax bill. In essence, a portion of the investment is returned to the investor as a taxable distribution.¹

As you can see in BlackRock’s disclaimer, buying a dividend causes investors to pay a tax that they do not owe. Paying taxes is never fun, but the thought of paying up to 63 times more in taxes than you actually owe? That is not fair or right. It should also be noted that “buying a dividend” does not happen just before a dividend payment, as BlackRock suggests.  Buying a dividend occurs as soon as the fund receives a dividend or interest payment from one of their underlying holdings.  That can happen, and most often does, on the first day of the payment period.  So generally, you are always buying dividends, which causes you to overpay and then lose money.

These unfortunate investor outcomes are not the fault of investment funds, so do not place blame on them. Accruing dividends and capital gains to the value of a security is required under the current last holder of record income distribution system. Under a last holder of record system, only the last holders of a security (on the record date) are paid the dividend or capital gain. To prevent people from attempting to game the system, investment funds must inflate the value of the security over the payment period, so that they can drop it on the ex-dividend day. This drop in the security’s value acts as a disincentive for those investors attempting to game the system and harvest the dividend. The decrease in the security value on the ex-dividend day creates a zero-sum game. You gain $1.00 per share payable to you as a dividend, which is now fully taxable, and you lose $1.00 per share in the value of the security.

But here’s the problem with the zero-sum game — the dividend distribution, which includes the dividend you just bought, is really just a return of your capital investment and is fully taxable. The after-tax effect is you lose money. This unnecessary taxation happens every time you purchase a fund or reinvest the dividends received in a taxable account. EVERY TIME!!!

You work hard for your money, and the current last holder of record distribution system punitively taxes you and your family. Furthermore, because the values of the security prices are inflated, you are buying fewer shares than you are entitled to buy, which diminishes your yield and compound annual returns. The combination of inflated asset values and unnecessary taxation causes an investor’s Total Cost of Ownership to be substantially higher than what they believe and what is disclosed to them.

Now, for the good news. 

FairShares has solved this problem. Investors no longer need to lose money in taxes they should not owe and overpay for securities they buy. We have patented a new payment and distribution system that allows investors only to pay taxes on the money they earn and reprices a security in a manner that reflects its fair value (not an inflated value).  These improvements dramatically enhance the returns that an investor will realize. By adopting our equitable distribution system, higher investment returns will be earned, and as a result, a better quality of life enjoyed by all.

Here is how you can play a role in fixing this broken system.

If you are an investment fund:

You owe a fiduciary duty to your shareholders to protect them from needless losses as well as work hard to lower their Total Cost of Ownership. Furthermore, the last holder of record system costs investment managers money as well. These unnecessary losses act as a drag on your assets under management. When your investors make more money, so do you. We are in the process of contacting all the major investment funds to let them know that a solution exists that mitigates the risk of “buying a dividend,” as described in their prospectus. We are hopeful that investment managers will do the right thing for their investors and engage FairShares as soon as possible. The saying “time is money” is quite relevant in this situation.

If you are an investor:

You can start by contacting your investment advisor, as well as the investment funds that manage your money. Tell them that inflated security values and unneeded losses are unacceptable and recommend that they contact FairShares as soon as possible. By simply telling them that a solution exists, action can be taken to correct this wrong. All fund families operate under the current system. If a few begin to act, the rest will assuredly follow, because it is the right thing to do for their shareholders.

By investors and investment funds uniting behind a common cause, together, we can change the way global financial markets work and improve the lives of hundreds of millions of responsible people who work hard to invest for their retirement and well-being.

It is important to note that individual dividend-paying stocks are also overvalued. When you purchase stocks, you are subjected to the same unnecessary tax as you are when you are buying investment funds.

Changes like this are transformational, especially considering the scope and the size of the investing public worldwide. But because it is a win-win for investors and fund families alike, we can all be heroes in this very worthwhile endeavor. But we must act, for every minute we delay, your losses grow.

We permit readers of this blog to republish this article in its entirety in any publication and in any country. Share this article with your family, friends, and your investment advisors. Let your followers on social media know that the days of losing money and overpaying for your investments are soon to be over.  The faster we can spread the word and educate the investment community, the sooner the industry will take action to address the inadequacies of the current dividend distribution system.

Follow us on Twitter @BuyFairShares to stay up to date on the first investment funds that will offer FairShares products. Let the world know you want to #BuyFairShares!

1. https://www.blackrock.com/us/individual/resources/faqs/tax-information-faqs