Dividends and Index funds ebbs and flows

With the rise of Vanguard Funds, many fund family have a lower cost option of index funds. In reality, if you buy the index and over the years the index has a very established manner to discard the losers (companies whose shares have decreased) and replace them with winners (companies whose shares are increasing), overtime the index will go higher. In addition, if you own the fund it charges a minimum fee, overtime your money will increase faster than if you own an actively managed fund which performs as well as the index fund. The big concern is markets go up and down, which means index funds go up and down and if you need your money quickly it may not be the best time to receive it. If you held your fund for a number of years, it should be higher. Sometimes actively managed funds do better than the index, sometimes they do worse than the index, no one really knows until we look at the past.

One of the issues for profitable stocks, which makes them valuable to own is often they are included in the index. Once a stock is in the index, typically the index funds will own at least 5% of the public float. This means if a company faces a downturn, it will get worse before it gets better. If a company comes out of the index, this means the index funds have to sell the stock, which can potentially depress the stock price even more. This means there is money to be made or lost depending on what the index is doing. The dates are announced in the press, and the investment dealers have a reasonable idea of which stocks are going to be replaced with the ones coming out. Once again, if the stock is in the index, the index fund has to buy the shares, if the stock is coming out, it has sell the shares. It is possible to keep the dates in mind and buy the stocks coming in and receive some upward increase as the stocks are added to the index. You keep them because they are profitable and growing.

Linking to dividend paying stocks, if you have a portfolio of profitable stocks, all the institutional advantages of the market work for you which is a good thing. The institutions have rules which stocks they can and cannot own; profitable stocks with dividends are included in index funds and being profitable allows the company to keep paying dividends. Let the institutions help you in building your wealth.

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

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