Jeremy Siegel: weight your index by dividends

I like this idea:
"Value-based" portfolios and fundamentally-weighted indexes generally have produced higher long-term returns than comparable capitalization-weighted indexes over various historical periods tested (all assume the reinvestment of dividends).

Similarly, research that I and others have done supports the conclusion that weighting stocks by some fundamental metric of value, such as dividends, sales, or earnings, instead of by market value, has historically resulted in generally lower portfolio volatility than weighting by market-capitalization. Of course, past performance is no guarantee of future results and there are limits on the inferences we can draw from research results and back-tested index data. However, I believe the data on fundamentally-weighted indexes are compelling.

I'm a big fan of indexing in general, and anything to improve returns even marginally interests me. I'm going to do more reading about this, and look into the existing funds Siegel mentions. I suspect that this is a real opportunity to beat capitalization-weighted indexes over the long term.

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