The appeal of the best dividend mutual funds should be clear: They offer a great dividend today, and they can grow in the future, helping investors win both ways. Plus, they offer other benefits, including reduced risk through diversification. So the best dividend mutual funds are an attractive prospect for any investor, but especially for retirees who need current income today but also growth for tomorrow, so that they can make more of their wealth. Do not survive
Here are the best dividend mutual funds and what you should keep in mind while investing. (Here are the best dividend ETFs if you’re looking for that kind of fund.)
5 Things to Look for in Dividend Mutual Funds
There are many factors to consider when you’re choosing a dividend mutual fund, and while the size of the dividend is important, it’s not the only criterion you should use.
- dividend yield: While it may be tempting to scour the mutual fund world for the highest returns and pick only those, you may run into trouble if you go down this route. The highest returns are likely to be lost, often because the fund’s investment strategy will not favor it over the long term. A high yield can then be a bad sign.
- Dividend Growth Rate: Closely related to yield, the fund’s dividend growth rate will show you how fast the payouts have grown over time. Generally, the higher, the better. But there’s usually a trade-off between the size of the dividend and how fast it grows. That is, a low-yielding fund can often grow its dividend faster than a higher-yielding fund.
- Long Term Returns: A fund’s long-term returns — the five- and ten-year numbers — are the best gauge for the stability of its strategy. Look for an average annual return that is much higher than the dividend yield. Otherwise, you’re sacrificing a lot of potential growth for income today. Or worse, your investment is losing money so you can receive dividends.
- expense ratio: A fund’s expense ratio is how much you will pay each year as a percentage of your total investments. You’ll pay this fee whether or not you’re making money in the fund, and so it’s better to minimize it, especially since you can find attractive dividend mutual funds without paying high expense ratios. An expense ratio of more than 0.5 percent — $50 per $10,000 in investment costs — is the pivot point from being reasonably priced.
- Holdings: Look at the fund’s holdings to see what types of stocks it owns: high-quality blue chip stocks or unknown companies in an industry with suspiciously high yields? While diversification can protect you from company-specific risks, it won’t protect you if the fund only owns stocks in one questionable industrial sector.
These factors may help steer you away from dividend funds, which have a high yield today and without a solid long-term track record. You then let your dividends roll in and use them to fund your lifestyle – a great passive investment – or reinvest them for greater returns.
Top Dividend Mutual Funds
Given below are some of the top dividend mutual funds with attractive long-term returns, growing payouts, reasonable expenses and no sales load. (Data from Morningstar as of May 24, 2023.)
Vanguard Dividend Appreciation Index Admiral Shares (VDADX)
This index fund tracks the S&P US Dividend Growers Index, which is a collection of primarily large-cap growth stocks and value stocks that have the potential to grow their dividends over time.
dividend yield: 1.9%
5 Year Returns: 10.5%
expense ratio: 0.08%
Tea. Rowe Price Dividend Growth Fund (PRDGX)
This actively managed fund seeks companies with sustainable upward-trend growth in sales and earnings that could allow their dividends to grow in the future. The fund’s holdings are mostly in large-cap and mid-cap stocks.
dividend yield: 1.1%
5 Year Returns: 10.8%
expense ratio: 0.64%
Vanguard Dividend Growth Investor Shares (VDIGX)
The fund invests in high-quality companies that can deliver strong total returns over time due to strong earnings growth and the ability to grow their dividends. Holdings generally consist of large-cap stocks, and the fund targets a diversified weighting across industries.
dividend yield: 1.6%
5 Year Returns: 11.0%
expense ratio: 0.27%
Vanguard High Dividend Yield Index Admiral Shares (VHYAX)
It tracks the passively managed FTSE High Dividend Yield Index, which is comprised of companies that pay higher-than-average dividends. The fund predominantly invests in large-cap value stocks.
dividend yield: 3.1%
3 Year Returns: 13.8%
expense ratio: 0.08%
Vanguard Equity-Income Investor Shares (VEIPX)
This actively managed fund invests in undervalued stocks that pay above-average dividends, and its holdings include mid-cap and large-cap value stocks. This fund is also available in the admiral share class under the symbol VEIRX with a lower expense ratio (but much higher minimum investment).
dividend yield: 2.8%
5 Year Returns: 8.2%
expense ratio: 0.28%
ground level
Dividends are a major source of returns for investors over time, and combine them with fund growth in value, and you have a powerful 1-2 combo that can build wealth with little risk for decades.
Source: www.bankrate.com
