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Talking indexes

Ask the Fool

Published: December 5, 2023

Q. What main stock indexes are there? -- D.M., Scottsdale, Arizona
A. The Dow Jones Industrial Average, launched in 1896, is one of the oldest and most widely referenced, but it contains only 30 companies -- like Apple, McDonald's, Microsoft, Nike, Walmart and Walt Disney.
The Standard & Poor's 500 is much broader, featuring 500 of America's biggest companies; examples include Amazon.com, Best Buy, Clorox, Dollar General, Hasbro, Hershey, Home Depot, Johnson & Johnson and Tesla. Together, the 500 companies make up about 80% of the total market value of U.S. stocks, so the S&P 500 is often referenced as a proxy for the entire stock market.
Another key index, the Wilshire 5000, includes almost every publicly traded U.S. company. The Russell 3000 index contains roughly 3,000 U.S. companies (including small, medium and large ones), which together represent close to 98% of the U.S. market. The Russell 1000 is composed of the 1,000 largest companies in the Russell 3000, while the Russell 2000 comprises the 2,000 smaller companies in it.
There are many other major indexes, such as the FTSE Global All Cap, which aims to represent the entire world's stock market; it encompasses more than 10,000 companies of varying sizes from dozens of countries, some with developing economies.
Various other indexes represent different countries, geographical regions, sectors or industries. And some focus on assets other than stocks, such as bonds.
Q. What's a "real" return? -- A.B., Troy, Michigan
A. It's a gain that has been adjusted by subtracting the effect of inflation. For example, if an investment has averaged annual gains of 10% over a period when inflation averaged 3%, the real average return would be about 7%.
Fool's School
Increase Your Social Security Benefit
The average monthly Social Security retirement benefit was only $1,840 as of August, or about $22,000 over the course of a year. Those who have earned more than average over their working lives will receive above-average benefits, but Social Security will still provide only a fraction of preretirement income. Still, there are things most of us can do to increase our future benefits.
For starters, aim to work for at least 35 years, because the formula the Social Security Administration (SSA) uses to determine your benefit is based on your (inflation-adjusted) earnings in the 35 years in which you earned the most. If you work for only 30 years, there will be five zeros factored into the calculation, shrinking your benefit. If you work for 38 years, the SSA will kick out the three years in which you earned the least.
This next tip is probably obvious: Earn as much as you can before retiring. The more you earn, the bigger your future benefits will be -- up to a point. (That limit increases in most years, and for 2023, it's $160,200.) That's easier said than done, of course, but you might try various strategies to increase your income for a few or many years. For example, ask for (and deserve) a raise every few years. Pursue a new certification, professional designation or degree in order to qualify you for higher-paying jobs. Consider taking on a side gig or two -- ideally something you enjoy, such as making and selling crafts, giving music or language lessons or driving for a ride-sharing service.
Consider waiting to start collecting your retirement benefits, too. You can begin collecting as early as age 62 or as late as age 70. Starting early means smaller checks, but many more of them. Delaying beyond your full retirement age (which is 66 or 67 for most of us) will make them bigger. Read up on this decision, because everyone's situation is different, and there are good reasons to start early, on time or late.
My Dumbest Investment
Favoring Dividends Now
My most regrettable investment was buying shares of Under Armour back in early 2016. Two years later, I was still underwater on it. I thought it would be a good investment, in part because I saw its logo everywhere on lots of people's clothing.
I learned that I prefer stocks that pay dividends. Dividends help you get a return even if you have to wait for a company to turn its fortunes around. Dividends also allow you to use dollar-cost averaging, if you reinvest them in additional shares of stock.
I've since moved that money to Apple, which is a dividend payer and a growth stock -- the best of both worlds. -- M.C., Apex, North Carolina
The Fool responds: Under Armour has been a popular brand of sportswear, but its stock has delivered mixed results in recent years -- and it's now more than 80% below levels it hit in 2016. The company has faced strong competition from Nike and Adidas, and (like many other companies) was hurt by supply chain issues related to COVID-19. Currently, it has a relatively new CEO and doesn't have a strong defensive moat relative to its rivals. Still, the stock price has fallen so low that many now see it as attractively priced.
You're correct that favoring dividend-paying stocks is a smart move for most investors. Companies paying dividends are generally more stable, with income dependable enough that management is comfortable committing to regular payouts.
Foolish Trivia
Name That Company
You may not know me yet, because I came to life only in May 2023. But I trace my roots back to the 1886 founding of Johnson & Johnson -- the outfit that spun me off. I'm now an independent company, with a recent market value of $38 billion, a bit below my $41 billion valuation at my initial public offering (IPO). By revenue, I'm the world's largest company focused purely on consumer health, with brands such as Aveeno, Band-Aid, Benadryl, Listerine, Motrin, Neutrogena, Nicorette, Tylenol and Zyrtec. My products are used by some 1.2 billion consumers worldwide. Who am I?
Last Week's Trivia Answer
I trace my roots back to my founding in 1993; I grew by acquiring many game developers. Today, based in New York City and with a recent market value topping $24 billion, I'm a major video game specialist. I rake in more than $5 billion annually. Three of my divisions include many popular games and game franchises: Rockstar Games (home of Grand Theft Auto, one of the most successful video games ever, with a new edition forthcoming), 2K (featuring NBA 2K, Civilization and more) and Zynga (known for FarmVille and Words With Friends). Who am I? (Answer: Take-Two Interactive Software)
The Motley Fool Take
Clean Energy Potential
Investors bullish on the growth prospects of clean energy should take a look at Brookfield Renewable (NYSE: BEPC). The company directly owns physical clean energy assets; hydroelectric power generates the lion's share of its portfolio's power, with solar, wind and other assets (like batteries) making up the rest.
Brookfield has a strategy of acquiring operating platforms with built-in growth. Earlier this year it agreed to acquire Duke Energy's commercial renewable energy platform, which has 5.9 gigawatts (GW) of assets operating or under construction, along with a 6.1 GW development pipeline. That deal, and others, will supply Brookfield with incremental income from the operating assets as well as growth from the development pipeline. Overall, Brookfield is aiming to grow its funds from operations (FFO) by at least 10% annually over the coming five years.
Brookfield Renewable is also a solid dividend payer, having increased its payout every year since 2016 at a compound annual rate of roughly 6%.
You can buy the stock in two different forms that have slightly different yields and tax treatments: a limited partnership (ticker symbol BEP) or a traditional corporation (BEPC). Sticking with BEPC will keep things simpler, taxwise. (The Motley Fool owns shares of and has recommended Brookfield Renewable.)