The Motley Fool: Every Sunday, useful tips on investing
Q: I recently noticed that a certain mutual fund’s top holdings included some solid dividend-paying companies.
Would you please explain where those quarterly dividends go? Do the companies pay those dividends to the mutual-fund managers?
A: When a mutual fund owns shares of a dividend-paying stock, the dividends paid belong to the shareholders, not the fund managers.
Typically, when you first invest some money in a fund, you’ll be asked to specify whether you’d like to receive the dividends as cash payments or have them reinvested in additional shares of the fund.
After a fund receives dividends and before it distributes them to shareholders, the dividends’ value is added to the fund’s net asset value (NAV). Later, the NAV is reduced to reflect the departure of accumulated dividends.
So don’t be alarmed if you see a fund suddenly drop in value one day — it might simply mean that a large distribution was made.
Q: Is this a good time to start contributing to a 401(k) account at work?
A: It’s almost always a good time. When it comes to retirement, most of us should be regularly saving and investing, without much regard for the state of the economy.
As we’ve been digging out of a recession recently, now is far from the worst time to invest.
Many of us should be saving and investing aggressively, too, not just socking away 3 percent of our salaries.
Crunch some numbers and see how much you’ll need in retirement and how much you’ll need to save.
You might need to sock away 10 or even 20 percent or more of each paycheck. Consider a broad-market index fund for long-term money.
What better gift can you give your children than a nudge toward financial independence?
It’s rarely too early to introduce them to investing. With decades ahead of them, they can reap great benefits from the magic of compounded growth. Here is an idea to help you play and learn together, build a mock portfolio.
Have your kids list companies that interest them.
If they look around their home, classrooms, the mall and on TV, they’ll see firms such as Nike, Microsoft, Coca-Cola, Apple, Wal-Mart, McDonald’s, Disney, American Eagle Outfitters, PepsiCo, Boeing and Johnson & Johnson.
Have them list a dozen companies, with ticker symbols, current stock prices and today’s date. Every day or week, have them record the latest prices. Calculate the gains or losses regularly.
Such short-term stock price movements aren’t terribly meaningful, but they can help a child understand how the market works.
Recently sporting a price-to-earnings (P/E) ratio near 25, a market value close to $300 billion and a stock price north of $800, Google (Nasdaq: GOOG) might seem like a stock too richly valued.
Think again, though, as the company still has much room for growth.
For one thing, look at its growth rates, as revenue has averaged 21 percent growth over the past five years, and earnings by about 19 percent.
Over the next year, analysts expect Google to grow by nearly 18 percent, and by more than 14 percent over the next five years.
Google is perfectly primed to mint money in our increasingly mobile future as its Android operating system has become the global standard in mobile computing.
Its profit margins are likely to take a hit as it adds more hardware revenue from smartphones, tablets and laptops, in part due to its acquisition of Motorola. But it remains the global king of searches and a leader in online advertising.