Dividends on Mutual Funds/Index Funds?

[Andrew Michaels]

I'm thinking about putting some money into an index fund; a general S&P 500 fund most likely. I was wondering if these index funds pay out dividends like regular stocks, and given that you hold relatively small amounts of 500 companies, how they are dolled out, etc.

Any info appreciated.

Thanks,
Andrew

[RT Wolf]

Generally dividends are reinvested back into the fund automatically (they buy you more units of the fund, the fund value doesn't change but the number of units increases), however they can be paid out to you at your request. Keep in mind, though, that most funds advertise returns based on reinvested dividends, and the almost 11% return of the stock market is based on reinvested dividends.

If you're looking for just income, then you might consider bonds, however if you're looking for both income and capital growth, then stocks are a better option, and if you're willing to spend the time to learn about it, there are ways to increase both your income and your returns. For example, blue chip stocks (such as those in the Dow Jones Industrial Average) tend to have higher dividends but lower stock appreciation rates (unless you follow the Dogs of the Dow strategy) than the average stock. Another thing I keep hearing about is the Fool Income Investor news letter. More info here:

Income Investor [Fool.com: Income Stock Research]

Some more info here:

Fool.com: Fool's School

That's if you want to spend the time, though. If you don't want to, then index funds are just wonderful.