Long-term Stock Index Investing: Own the S&P 500 to Track Large U.S. Companies
You can take a lot of the uncertainty out of long-term stock investing by owning the S&P 500, a diverse group of around 500 large U.S. companies that represent the broad economic activity of the U.S. As the economy grows over the long term, these stocks should increase in value leading to large returns for investors. And many of the S&P 500 companies pay regular dividends some of which increase year and year.
A quick and easy way to own the S&P 500 is to buy an exchange-traded fund (ETF) that tracks all of the companies in the S&P 500. The most popular such ETF is the SPDR® S&P 500® ETF. Its trading symbol is SPY. You can buy it in your brokerage account. All ETFs charge fees to cover their expenses, but while some annual fees can approach one percent or more, the annual fee for SPY is a mere 0.09 percent. High fees will significantly reduce your total return over the long run so avoid ETFs that have them.
Dividend-paying stocks are a real plus to investors. They pay cash dividends based on the dividend rate and number of shares that you own. For example, if you owned 100 shares of a stock that paid an annual dividend of $1.00 per share, you would receive $100. Assume the stock price was $50 per share. With dividend reinvestment enabled in your account you would buy two additional shares with the $100 dividend giving you a total of 102 shares. The next time a dividend was paid you would receive $102 because you owned 102 shares. Over many years buying shares with dividends paid to you (dividend reinvestment) will significantly increase your total return. Dividends are usually paid every three months so over many years you'll accumulate additional shares and more shares means more dividends which means more shares via dividend reinvestment and so on. Simply select the dividend reinvestment option in your account and the actual dividend reinvestment process is done automatically.
Historically the S&P 500 has returned on average around six percent annually. Increase in the price of stocks accounts for around four percent and reivested dividends add another two percent. These returns may not seem like a lot but compounded over a multi-year period a six percent return will achieve huge returns. And if you invest new money regularly, say monthly, gains will really pile up over time. Here is a chart of SPY dividends.
Of course stocks do not go up continuously so there will be periods when annual returns will be negative as stock prices fall. But unless you cash out during these down periods, you really shouldn't be hurt in the long run. During these down periods you will be adding more and more shares through dividend reinvestment. And if you have a regular monthly investment program, you'll buy shares at relatively low prices so you will keep accumulating more and more shares. Often a "bad" few years in the stock market are "good" investing opportunities for long-term investors. So if you stay optimistic and hold on, your long-term returns will very likely be positive.
The following chart show 20-year returns for an initial $10,000 investment in SPY.
|The SPDR® S&P 500® ETF Trust|
|The SPDR® S&P 500® ETF Trust||SPY|
|Price charts from Alpha Vantage as of most recent close.|