How do Index Funds afford to pay dividends differently?


Quick Answer

As with other mutual funds, index funds pay dividends based on the dividend policies of the companies in which the fund is invested, as index funds are simply mutual funds that are not actively managed, according to Fidelity. The shares in an index fund are bought and sold based strictly on the index the fund is following. This model allows for fewer fees and more reliable performance, which can lead to a better return on the investment, notes Forbes

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Full Answer

Although stocks pay dividends at different times throughout the year, most mutual funds only pay distributions once or twice a year, because of the cost associated with bookkeeping and mailing out statements, explains Jeffrey David Oldham, posting for the Stanford Theory Group. The distributions include capital gains from the sale of securities, as well as the dividends periodically paid out by companies from their profits.

Fewer fees are not the only advantage to investing in index funds, indicates Forbes. This unique type of mutual fund frees the investor from having to watch the stock market, since decisions about which securities to buy and sell are already made for him based on the index. This can help investors avoid the tendency to sell out of panic when the stock market falls. It allows investors to more easily remain consistent, enabling them to receive a better return over the long haul.

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