High Dividend Stock Portfolio vs Dividend Index Fund, Which Is Better for You? (1)

With-profits index funds, increasingly popular with investors.

This fund focuses on stocks with high cash dividend yields, stable dividends, size and liquidity, which are listed in mature industries, with solid business development and strong market competitiveness, and will provide good returns in both the upside and downside of the economy.

In addition, the passive investment approach, low fees and predictable performance of index funds are also the reasons why many investors recommend them.

But even in index funds, the difference between ideals and reality can be seen in the actual operating reports, which are not perfect and can upend your perceptions.

From a dividend index fund, a clear look and a clear buy can see that for a dividend index fund, dividend returns are much less than stock investment returns.

Index funds are completely "passive" positions, and since compulsory buying and selling of constituent stocks can produce good investment returns, what does this tell us?

The index itself is public, so would it be better to create your own portfolio of high-dividend stocks and track the dividend index as well, rather than investing in a dividend index fund?

01 Sources of income from equity investments

The Fund's income, as well as its dividends, is mainly derived from the "undistributed profits" of the Fund's operations, which can be seen in the "balance sheet" of the Fund's report.

The undistributed profit for the period is derived from three main sources.

(1) Undistributed profits at the end of the previous period

(2) Number of changes in the share of redemptions purchased

(3) Profits generated during the period

Of these, the profits generated during the period, in turn, came from three main sources.

(1) Gain on stock investment, i.e., profit from the sale of stock.

(2) Dividend income, passive cash dividends.

(3) Gain on change in fair value, which is the change in market value of the stock position.

For with-profits index funds, the purpose is to track the dividend index, which is basically close to a full position, and the dividend income is to sit on the dividend, all in a relatively fixed pattern.

Going back to the roots, the main analysis of this fund's stock investment returns, where do the returns come from, given the high percentage, or so-called passive trading?

Equity transactions in index funds can be divided into three scenarios.

1) Trading in index-tracking transfer positions

Every once in a while, the index will automatically switch positions. In the case of the SSE Dividend and CSI Dividend Indices, there is an annual swap in mid-December to "swap out" stocks with low dividend yields that don't qualify. "Transfers" into new stocks with high dividend yields.

In the case of index funds, whenever the index announces a transfer, the Fund sells "out" shares and buys "in" shares in the short term in order to better track the movement of the index.

This type of stock trading is completely "passive", short term and concentrated.

(2) Deal with the buying and selling of fund subscriptions and redemptions

Indexes are theoretical, but index funds operate in reality, and the fundies are the ones who have to deal with the purchases and redemptions.

New share subscriptions, meaning buying in proportion to constituents to better track the movement of the index.

For new share redemptions, the fund will generally have a small percentage of cash reserves to reduce the pressure to sell shares, but it will also need to sell in proportion to its constituents if the redemptions are large.

New subscriptions and redemptions are difficult to predict accurately, whether they occur in terms of timing, volume, percentage of redemptions, etc., all of which can affect the performance of the fund's operations.

3) Active trading

For "pure" index funds, no active stock trading is allowed.

For "enhanced" index funds, it is possible to have a small percentage of active equity investments, but the percentage of such active investments is relatively small.

02 Index repositioning and fund adjustments

Stock indices, every six months or a year, are subject to sample adjustments, which can be checked from the index company.

For the Dividend Index, the index sample and weightings are adjusted in relation to the dividend yield, the market and turnover, with the dividend yield being the most important indicator.

"Dividend Yield = Cash Dividends / Share Price", a decrease in the dividend yield will be "transferred out", either due to a decrease in the dividend or an increase in the share price; an increase in the dividend yield will be "transferred in", either due to an increase in the dividend or a decrease in the share price.

Changes in dividends are generally long term and continuous, while changes in share prices may be short term and sudden, so this "transfer" and "transfer", that is, to sell highly valued stocks, buy highly valued stocks, which is precisely the reason why dividend index funds can realize investment income even if they sell shares passively.

The fund's semi-annual and annual reports have more detailed disclosures, including financial statements, a complete list of positions, Top 20 Buy Ranking of sales, share changes, etc. Or, for example, look at the index fund 510880, which is the top dividend index fund, and see if the index was switched at the end of 2017 It can be fully reflected in the 2017 report.