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By Bob Moeller
WEAC Member Benefits
April 2004
Financial
Planning Seminars
Achieving
Financial Independence
My last column covered dividends and how you as an investor might do some research, set up a discount brokerage account, and purchase stock for the purpose of locking in a steadily increasing income. You might want to read that column on OnWEAC at: www.weac.org/News/dollars.htm.
This column is somewhat related, but also covers a new way of investing. At least partially due to the success of the S&P 500 Index Fund, many index funds have begun over the past few years. In general, index funds are limited to specific types of stocks such as retailing or banking stocks.
They tend to lock in fairly rigidly the stocks they own, subject to occasional change. They tend to have minimal management costs, so you pay very small management expenses relative to what you might pay in a “managed” mutual fund that pays analysts big salaries to decide what to buy or sell. Time has proven index funds to be equal performers or better. Investing in index funds is often referred to as “passive” investing. Your retirement system has a considerable amount of money invested in index-type funds.
More recently, a new type of index fund has surfaced. This is called an exchange-traded fund. ETFs also follow an index approach, but trade openly on the stock exchanges rather than once a day through some mutual fund family. Again, these funds select a specific group such as transportation or real estate. They are also basically unmanaged once formed. In other words, they don’t buy and sell issues every day. So, in effect, they tell you, “We are going to hold these kinds of shares and watch them go up or down and collect any dividends. We will rarely sell, so you will rarely have to worry about capital gains declarations on your income taxes because of something we did. You can buy a piece of the action by buying shares in our fund on the stock exchange.”
Note, you pay regular commissions, so you want to deal with a discount brokerage house.
ETFs are an excellent way to invest, and some firms now specialize in advising clients purely in ETF investing. And, with the proliferation of ETFs over the past couple of years, you may need some help in figuring out which ones to select.
All of this is an introduction to a specific ETF that began last November. It is the iShares Dow Jones Select Dividend Index Fund (symbol DVY). Designed to track the Index created by Dow Jones, the fund measures the performance of a selected group of equities issued by companies that have provided relatively high dividend yields consistently. To be included, the stock must have:
The goal, of course, is to buy strong companies that consistently raise their dividends and will in the future. The approximate annual yield now is about 3.3%. The fund holds 50 stocks, with banks accounting for 39%, electric utilities 19%, and chemicals 11%. The biggest individual holdings are Bank of America (yield 3.8% dividends paid each year since 1903), Altria (yield 4.6%, dividends paid since 1938), and Florida Power & Light (FPL) (yield 3.6%, dividends paid since 1944). Total management fees on the fund equal 0.4% per year. For those of you who are hesitant to pick out your own dividend-oriented investments, this may be an attractive way to lock in an income that right now beats what you can earn in money funds and short-term CDs, and will most likely in the future increase each year.
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On a different subject, those of you who do business with American Express might want to go to the library and review the Wall Street Journal for February 9, page C1. You know that when a publication that favors business prints a negative article about one of its own, it must be serious. Essentially, it is a negative review of how, when providing financial plans, many AmEx sales agents were more concerned about their own pockets being full than their customers. I have reviewed AmEx products sold to members and determined they were not in their best interest.
Posted March 19, 2004