The Money Mustache Community
Learning, Sharing, and Teaching => Investor Alley => Topic started by: schoenbauer on September 09, 2015, 12:49:28 PM
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Hey there,
I was wondering about the influence of dividend distributing politics on the index composition. Isn't it that non-distributing companies are weighted more than distributing companies over the long haul? Let's say the index is comprised of company A and B only. Both grow at the same rate. Company A does not, company B does distribute parts of its earnings. The dividends are reinvested into the index and now the market cap of A should be larger than from company B. So I would be buying more A than B...Am I seeing this correctly? What are the implications of such an effect?
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No, typically companies only pay dividends when they are mature and have lower growth prospects, this results in a majority of megacap companies paying a dividend. Once companies grow to be a certain size, they typically BEGIN dividend distributions, ie Apple/Gilead. There are exceptions like Berkshire and Google, but those are the exception rather than the rule
What you are talking about doesn't affect market cap, price for company shares are still set by active investors/market makers, not passive indexers