Dividends and Index-provider overhaul set to change the way portfolios are put together

In early September an article by Tim Shufelt reminded investors there is big news happening on September 24. There is a group called Global Industry Classification Standard (GICS) which has spent countess hours examining stocks and has determined some of them need their classifications changed. The GICS are the bones which both S&P and MSCI used to categorize stocks and build indexes. The GICS does this on a regular basis, but this time there is a greater emphasis on the technology companies and thus affect indexes. Some of the tech stocks are going to join the telcom classification.

First the value of the index has changed over the years, the most famous is the Dow Jones 30 which a few months ago took GE out of the index and was replaced by Walgreens. The indexes twice a year change stocks, typically those that are not doing well financially are replaced by those that are doing well. The effect of this change is over time the index will rise. It is why part of your portfolio should be in an index fund.

On September 24, GSCI reasoning is tech has more than one element – those companies that use technology and those that produce technology. Most of the readers should know the FAANGs – Facebook, Apple, Amazon, Netflix and Google have been some of the best stocks to own and the group has helped push up the major indexes to new highs.

Joining the telcom group are companies such as Facebook, Alphabet, Twitter, as well as Netlix and Disney. Traditionally the telcom sector because the market is more mature and the companies fight over existing consumers, who make regular payments to their bills means one reason to own them is the dividend yield. With the new companies coming in accord to Ned Davis Research the dividend yield for telecoms will fall from 5% to 1%. The communication sector will be more heavily weighed in tech stocks with more than half of its market value based in former IT names.

Linking to dividend paying stocks, there is a very good reason to buy the stocks, they are profitable and can easily pay their dividends. This means if the general market goes down, profitable stocks tend to bounce back first and with the dividend you can be buying more stock at lower prices or using it for other opportunities. In terms of index funds which are terrific to own over the longer term, if you own a fund for a particular reason, see how it will be adjusted after the 24th. It could change your risk profile or it could help it, but understand a change will occur.

There are more questions than answers, till the next time – to raising questions.

 

 

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