The Growth Fund of America, worth $147 billion, has proven that active fund management can surpass the passive index fund because managers have free hands to implement creative strategies when choosing stocks and sectors.
Let us illustrate how the CAIBX, +0.26% (Capital Income Builder from American Funds) has the potential to surpass the passive index fund by combining stocks and bonds. Still, many experts are still in doubt and discuss the passive and active investment management techniques, and they still have not reached an agreement.
Index Fund Advantages
What speaks for the index funds is that they have low fees, and the statistics have shown that their overall performance, if compared, is better for every year. Such conditions have increased investments in the index funds in general.
The passive index had an inflow of $184.6 billion in September this year, while an outflow of $236.2 billion from the actively managed funds has been recorded. It is very interesting to see investment migrating to the index funds. Of course, one of the reasons is the low fee rate. Nevertheless, it is somewhat strange to see all the investments go to the index fund if we consider that for a series of years the stock market has been rising in value thanks to short-term interest rates.
One cannot help but wonder what the benefits of actively managed investments are when the index funds seem so promising.
Dividends in a Weakened Securities Market
Dividends are often underestimated if we consider that investors still harvest their dividends regardless of the stock prices.
One of the most outstanding financial experts, Mr. McIntosh claims that dividend-stock investments can be enormously profitable if investing in stable and reliable companies which have solid dividend rates backed up by solid cash flow. In this case, even if the market prices tumble down, such investment can generate unexpected returns.
The Income Hunter
The American Funds Capital Income Builder has been in existence for 29 years, and its major focus is on income increase via a diversified portfolio. The fund follows a flexible policy as it can invest a part of its assets overseas. They also pay dividends on a quarterly basis, and its Securities and Exchange Commission Yield stands at 2.95%. As an income hunting fund, it is only natural that it tries to controls asset volatility, particularly in comparison to growth funds.
A lot of trust is vested in quality dividend assets regarding their potential to outperform. We already said that the fund is income-driven, and as such, it cannot generate long-term digits like growth funds.
Experts also recommend investing in the health care sector which offers quality dividends and steady growth, but the sector is still marginalized in the sense that it is not very appreciated. That is the ideal opportunity to make an intelligent investment in a market full of potential and not overcrowded.
Hanks from the LA Capital Group, who works for the American Funds Capital Income Builder, emphasized the performance of the two most dominant fund holdings which increase dividends every now and then. AbbVieInc. ABBV, +8.71% rose tremendously from +2.26% (the company originated from Abbot Laboratories). The company introduced the famous quarterly payout of dividends in 2013, and by the next year, it raised the dividend by 5%, and re-raised in 2015 by 17% (to 49 cents), and in January of 2016 by additional 12%.
Amgen Inc. is meanwhile paying out 1$ per share on a quarterly basis after the dividend has been raised by 17% from almost 80 cents. In 2015, the dividend increase amounted to astonishing 30%.
Hanks is also keeping an open eye on the European utilities, which have better dividends regarding sustainability and are overall a better deal than US utilities, according to his predictions.