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Rebalancing within a Dividend Fund or Index
Old 08-06-2013, 04:33 PM   #1
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Rebalancing within a Dividend Fund or Index

I feel a little inadequate asking this question, but having pride won't help me out.

I am trying to understand something. What would be the difference of my having a segment of my portfolio where I picked a basket on individual dividend stocks, verses buying a particular type of Dividend paying fund from Vanguard. Do they do any re balancing of the individual stocks in the fund?

Since the purpose of selecting some Dividend stocks in the first place,would be to boost your income without having to sell your principal investment. Even if the stocks continue to pay dividends, the actual value of the stocks go up and down all the time. Without re-balancing each individual stock every year, what is the likelihood of seeing any actual growth.

According to Geraldine Weiss and Kelly Wright of IQT Newsletter (held in high regard over the years) All large cap stocks are cyclical and go through a low to high valuation, and suggests only holding those stocks until they reach their all time high levels or some other important fundamental changes.

This would seem to me that these stocks must be traded from time to time (rebalanced) in order to realize any real price appreciation of your stock portfolio. So, if this is the case, other than dividend payouts, shouldn't a dividend fund (or any kind of index fund for that matter) from Vanguard or other Dividend Index require some re-balancing within - for real growth to occur. In other words, holding Johnson and Johnson, or Coke or any other major player forever is going to be a roller coaster of share price over long term, right?

So, if you had a basket of mixed stocks, would you do your re-balancing according to sectors. (health, utilities, food, etc.) or perhaps if after a significant gain. However, to the best of my knowledge the available low cost funds do not do this. Their growth seems to only occur when you reinvest the dividends. They don't re-balance the individual stocks. So it seems to me that the only reason to hold such a fund was for upping your income percentage, but at the cost of sacrificing growth.

So people who try and create a very heavy Dividend Portfolio to live off dividends alone would either
1. have to have a large enough nest egg to be able to give off enough income needed, or
2. Do some active management for the smaller one they do have.
Please explain what I am missing or where I'm wrong.

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Old 08-06-2013, 04:47 PM   #2
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Originally Posted by modhatter View Post
Do they do any re balancing of the individual stocks in the fund?..
That depends on the fund, but generally unless a fund declares itself an index fund, the manager does sell what he thinks will not go up more, and use the proceed to buy something else that he thinks has a better prospect. So, the answer is "Yes, for an active fund".

For example, let's look at Wellington because that is currently a hot topic here in this forum. Look on the Web, and you'll see that Wellington has a portfolio turnover of 30%. This means over 1 year, they sell and buy (trade) about 30% of their holdings.

Some funds like Dodge & Cox have a lower turnover of 15%. On the other hand, some of the so called "growth" funds have turnovers approaching 100%, as the managers want to chase hot stocks.

As an example of what Wellington bought and sold, the latest data in March 2013 showed that it was decreasing its holding in Pfizer, and increasing the holding in Wells Fargo.

Note that MFs and holding corps like Berkshire Hathaway only report on what they have already done, not what they are doing or plan to do. They would not want to reveal it, because competitors would try to get in before they do and bid the price way up.

I hope the above helps.

PS. When you buy an active fund, you are trusting the MF manager to do the right thing for you. Or rather, that he will do better than you can yourself. That's the bottom line.

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Old 08-06-2013, 10:09 PM   #3
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You'll have to read the prospectus or an analyst report to figure out the rebalancing strategy of a dividend index fund. They will have a fixed algorithm for selecting and weighting stocks for size and quality of dividends and likely some other fundamental factors. They may update their index once a year or more, which will cause some, hopefully small, turnover.

There is no requirement to buy and sell in order to achieve capital gains. However, some of your "growth" is returned to you as the dividend. So price appreciation might appear to be less than an average stock or fund. Hopefully if you reinvested the dividends your portfolio growth would approximately equal an average stock or similar fund.

Many dividend funds are just large-cap U.S. value investments. Not much to diversify across within that space. That's a single piece of my slice and dice AA. Many funds will try to stay close to the sector weightings of something like the S&P 500, but that might not be realistic for a mechanically selected dividend index fund. Some sectors just have more dividends than others. Mostly I think they're just picking stocks that meet their screens from whatever total pool of stocks they're looking at.
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