John Hancock Fund Signals High Payout, But Don’t Confuse Cash Flow With Performance

Quarterly distribution declared and the essentials shareholders need now

John Hancock Diversified Income Fund announced a quarterly cash distribution of $0.25 per share, payable on December 31 to shareholders of record as of December 11. The notice outlines where that payment comes from and how the fund will report it for tax purposes. For investors, the immediate facts are straightforward: you will receive cash if you held the shares by the record date, and the fund will supply tax reporting later this year.

How the distribution breaks down — the 50/50 split and year-to-date totals

The fund says this distribution is made up roughly half from net investment income and half from net realized short-term capital gains. In plain terms, about 50% of the payout is ordinary income earned by the fund’s holdings, and about 50% is profit the manager realized from selling positions held for a short period. The notice shows no allocation to net long-term capital gains and no return of capital for this payment.

On a fiscal year-to-date basis the fund has paid roughly $1.00 per share in distributions, with the same general pattern: the bulk coming from investment income and short-term realized gains rather than long-term gains or return of capital. That composition matters because it determines how the payment is taxed and how it affects the fund’s reported earnings and net asset value.

Tax reporting, estimates versus final numbers, and what a return of capital would mean

Expect a Form 1099-DIV next year that breaks the payment into ordinary income and short-term capital gain categories. The December distribution is initially reported as an estimate; the fund will provide final tax-character information after its fiscal year ends. Until the final statement is issued, the allocation could be adjusted slightly if the firm’s year-end accounting changes the mix of income and gains.

Importantly, the fund’s notice indicates there is no return of capital component for this distribution. A return of capital reduces your cost basis in the shares — which can increase future taxable gains when you sell — and signals the payout didn’t come from current income. Because this distribution is not a return of capital, shareholders are being paid from realized income and gains, which is generally less risky from a capital-erosion standpoint than repeated ROC distributions.

Putting the payout in performance context: yield, NAV and managed distribution plans

On the surface, a quarterly cash payout like this can lift the fund’s current yield. Based on the announced amount, the distribution implies an annualized rate north of 8% when compared to recent share prices. That number is eye-catching, but it does not tell the full story.

The fund operates what investors commonly call a managed distribution plan: a set cash payment schedule intended to provide steady income regardless of short-term portfolio performance. That plan can make yield look attractive while the fund’s net asset value may be flat or falling. NAV-based returns — the change in the value of the holdings plus reinvested distributions — are the truer measure of how the underlying portfolio is performing. If the NAV declines, a high distribution may be masking losses rather than reflecting robust returns.

What shareholders should do next: practical steps and cautions

Shareholders should mark their calendars for the December 11 record date and expect the December 31 payment. When tax forms arrive, review the 1099-DIV closely to see how much of the payout is ordinary income versus short-term gain. Because the distribution is largely ordinary income and short-term gain, the tax hit will generally be higher than if it were long-term capital gains.

Keep the managed distribution framework in mind when judging the fund. A steady cash payment can be valuable for income-focused portfolios, but it can also hide underperformance if distributions are sustained by selling assets or realizing frequent short-term gains. For investors focused on total returns or capital preservation, the NAV trend and the fund manager’s strategy deserve attention alongside the headline yield.

If questions remain about the distribution’s composition or future policy, shareholders can contact the fund’s shareholder services for the official breakdown and any updates on distribution policy. Treat the payment as cash now, but examine the bigger picture — taxes, NAV, and the source of the payout — before concluding the fund is delivering sustainable income.

Sources

• prnewswire.com