How to Diversify Stocks for a Trust - dummies

How to Diversify Stocks for a Trust

Investing in the stock market is a popular way to produce income from trust principal for the trust’s income beneficiaries. Stocks, sometimes referred to as equities, are ownership interests in corporations. As a partial owner in a corporation, the trust is entitled to a share in the corporate profits, which are paid as dividends.

In order to diversify the trust’s stocks, the trust needs to invest in a broad range of companies, covering all the major areas of the stock market. And, in this increasingly international age, you don’t want to focus only on U.S. companies.

Some experts say that an adequately diverse portfolio should contain stocks in no fewer than 75 corporations. Others raise that number to 140 or more. If you’re investing a relatively small amount of money, you can circumvent the necessity of buying tiny amounts of stocks in so many companies by investing instead in one or more broad-based mutual funds. Just be sure to read the prospectuses before you invest.

You don’t necessarily need to buy stock in corporations that pay regular dividends. Some fine corporations never pay any dividend. As trustee, you’re safe investing in a non-dividend paying corporation, provided you can see the potential for growth in that company.

As a corporation’s value grows, the trust is entitled to a share of that growth. As long as the trust continues to own shares, the corporation’s increased value translates to an increased market value for the shares you own. When you sell those shares, the money you receive for them should exceed what you paid for them, giving you a capital gain.