Best Dividend Mutual Funds for 2017
There are some things that never get old, and for investors, it’s a steady source of income and growth via capital appreciation. But the average dividend yield is currently only about two percent, and dividends with a high yield tend to have greater risk associated with the investment.
So how are income investors supposed to gain steady and reliable income while still having capital gains to look forward to?
The answer is easy: with high-paying dividend mutual funds. With these, you could earn a dividend yield that is higher than the two-percent average seen by the markets. The risk level with mutual funds is also lower than owning a stock boasting a high dividend. And these are only some of the benefits that come with investing with a mutual fund. Read on to learn more.
What Are Mutual Funds?
A mutual fund is an investment product that is made up of a pool of funds formed through many different investors. All the capital is then pooled together to purchase stocks, bonds, and other investment products.
Various investments are held within mutual funds without the need to purchase each security individually. There is also a set of rules and guidelines regarding which investments can be held and how much exposure there can be to one area of the market.
How Do Mutual Funds Pay Dividend?
Stocks are owned within the mutual fund, which then flow to the investor. The majority of the time, the dividend will be used to purchase more shares of the mutual fund. There is also the option of receiving a cash payment, which is deposited straight into your brokerage or banking account.
Benefits of Investing in Mutual Funds
Here is a look at why investing in mutual funds could benefit your investment portfolio.
1. Diversification of Income Benefit
Let’s say you own one dividend stock that offers a high yield. Then, all of a sudden, the dividend is cut by the company. This would affect you in two ways. One, you’re obviously receiving less money from the investment. Two, you would likely be stuck selling the stock off at a lower price than what you paid. All in all, the stock was a total net loss for you.
A mutual fund investor doesn’t have to worry about any of this. The funds offer more than one position–sometimes hundreds–with little capital allocation (based on a percentage of capital) in each stock. So if the same stock mentioned above was owned within the mutual fund, its dividend being cut wouldn’t mean much, since it makes up such a small portion of the invested capital. Another position seeing growth could also offset the loss.
2. Professional Management
With mutual funds, a team of advisors and portfolio managers look after the allotted capital and make the related decisions. These individuals have years of experience in choosing investments, researching potential companies, and forecasting outlooks. This, and the fact that the investments are reviewed regularly, helps to keep the amount of risk at the bare minimum. Investments are added and removed as necessary to meet your personal criteria.
3. Liquidity
When buying or selling a position in a stock, the ease of liquidity is always a concern. With a mutual fund there is no such concern. If there was a buy or sell order placed for a mutual order it would be filled the next business day. Also the size of the order would not impact the price at all, which is an issue at times with a individual stock. Whatever the price of the fund happens to be that particular day, that’s what would the order would be filled at.
4. Low Barriers to Entry
It can be hard to purchase all the securities you want exposure to, given you only have so much capital, which means potentially missing out on some stellar growth. But with mutual funds, there is a lower chance of missing such opportunities, thanks to the variety of investments within a single fund. If you want, say, exposure only to large-cap technology companies, there’s a mutual fund for that.
Most the time, the minimum capital requirement to buy a mutual fund is $100.00. And if your budget allows, this amount means you could afford to buy new funds on a weekly, semi-monthly or even monthly basis. There are no commission costs and the units would be accumulated at different prices; if the price of those in the fund happened to fall, then more units would be purchased for the same amount. And if the price saw a gain, it means your investment is seeing a positive return, and is therefore still a good thing.
5. More Free Time
Purchasing 100 individual stocks would take a great deal of time, what with all the researching and reading and actual purchasing. But with a mutual fund, you only need to put the work into one investment product. The management team does the rest while still getting the same quality of stocks as if they were bought one by one.
So what are the best mutual funds for dividends? Here is a list of the top-paying dividend mutual funds that are worth consideration.
List of 7 Mutual Funds That Pay Dividends
| Name | Symbol | Frequency |
| Vanguard High Dividend Yield Index Fund Investor Shares | VHDYX | Quarterly |
| T.Rowe Price Dividend Growth Fund | PRDGX | Quarterly |
| Vanguard Utilities Fund Admiral Shares | VUIAX | Quarterly |
| Columbia Income Builder Fund Class A | RBBAX | Monthly |
| Vanguard Dividend Appreciation Index Fund Investor Share | VDAIX | Quarterly |
| Vanguard Target Retirement 2030 Fund | VTHRX | Annually |
| Vanguard REIT Index Fund Admiral Shares | VGSLX | Quarterly |
1. Vanguard High Dividend Yield Index Fund Investor Shares
Vanguard High Dividend Yield Index Fund Investor Shares (MUTF:VHDYX) offers a broad investment exposure to U.S. companies that are paying a high yield. The funds contains slower growth companies with consistent and predictable revenue. This is a potentially great source of long-term investment growth—mainly income—with some capital gains.
VHDYX is also a great example of a very diversified mutual fund, given it holds over 400 stocks and investments in 11 different sectors. Roughly $4.00 of every $10.00 is invested in the financial, healthcare, and technology sectors, which are also the largest holdings. The dividend is paid quarterly.
There has not been much turnover within the portfolio over the years, with approximately $0.10 of every invested dollar being reallocated into other investments on an annual basis. Core positions that will always have some exposure include Johnson & Johnson (NYSE:JNJ), Wells Fargo & Co (NYSE:WFC), and AT&T Inc. (NYSE:T).
2. T.Rowe Price Dividend Growth Fund
T.Rowe Price Dividend Growth Fund (MUTF:PRDGX) invests in large-cap dividend-paying stocks, in which at least 65% of the total capital is invested. Occasionally, remaining investments will be in companies with a greater growth outlook and no dividend paid or left to sit in a cash position.
Many of the companies held have both a growth and income profile, such as PepsiCo, Inc. (NYSE:PEP). Pepsi stock enjoys annual dividend growth because its earnings are protected from inflation, passing along increased operating costs to consumers and keeping margins strong and steady.
PepsiCo has increased its dividend for 44 straight years, which helps the fund pay out its regular quarterly dividend. And keep in mind that Pepsi is just one example of an investment within the fund that offers both growth and income. There’s also the reduced overall risk mentioned earlier.
Also Read:
5 Best Vanguard Retirement Funds for 2017
5 Best Bond Funds to Consider in 2017
3. Vanguard Utilities Fund Admiral Shares
A low-cost method of gaining access to utility companies in the U.S. stock market is Vanguard Utilities Fund Admiral Shares (MUTF:VUIAX). This sector-focused fund offers exposure to companies that distribute electricity, water, and gas.
Nearly 60% of capital is invested toward electric utility companies, while 30% goes towards multi-utility businesses. The latter is a bit more diversified, with exposure to companies that provide power via wind, solar, coal, water, and gas.
There are more than 75 stock positions within VUIAX, with the top 10 holdings representing just over half of the fund’s capital. Holdings include Southern Co (NYSE:SO), Duke Energy Corp (NYSE:DUK),and American Electric Power Company Inc (NYSE:AEP).
4. Columbia Income Builder Fund Class A
Columbia Income Builder Fund Class A (MUTF:RBBAX) is a mutual fund that pays monthly dividend to investors.
RBBAX seeks to maximum income potential by investing in sources that pay out an income, such as equities, fixed income, alternative, cash and cash equivalent investments. The equities are in the range of 15% to 30%, while the rest is in fixed income and alternative investments.
All the investments have income that keeps pace with or at least exceeds the rate of inflation and offer the potential for capital gains. The fund is managed to ensure capital preservation, with funds allocated as better investment opportunities arise based on market conditions.
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5. Vanguard Dividend Appreciation Index Fund Investor Share
Vanguard Dividend Appreciation Index Fund Investor Share (MUTF:VDAIX) is focused on high-quality large-cap companies that have a track record of increasing their dividend.
Holdings within this fund include 3M Co (NYSE:MMM), Abbott Laboratories (NYSE:ABT), and Western Alliance Bancorporation (NYSE:WAL). These are all “dividend aristocrats,” companies that trade on the major exchanges and have increased their dividend for 25 straight years.
VDAIX is a very diversified mutual fund with more than 80 stocks held and nine different sectors. Sectors that are represented in VDAIX are industrial, consumers goods and services, and healthcare, among others.
The dividend tends to be paid out every March, June, September, and December.
6. Vanguard Target Retirement 2030 Fund
Vanguard Target Retirement 2030 Fund (MUTF:VTHRX) is a very unique mutual fund available for purchase. If you plan to retire between 2028 to 2030 and are looking for an investment product that lowers its risk over time, then VTHRX may be perfect for you.
How it works is that the team handling the fund will lower the risk over time. Initially there will be a greater portion of capital invested towards equities, but eventually more capital is reallocated towards bond investments (fixed income). As the fund gets closer to 2030, rebalancing will become more frequent. The ultimate goal is to preserve VTHRX’s capital for the sake of retirees. Note that after 2030, this mutual fund will longer be available.
This is known as a “fund of fund” investment, in which capital is allocated into other mutual funds. There are a total of four different funds held, which would include investments in international stock and bond indices.
7. Vanguard REIT Index Fund Admiral Shares
Vanguard REIT Index Fund Admiral Shares (MUTF:VGSLX) invests in real estate investment trusts, companies that receive tax breaks and pay out at least 90% of their cash flow via a dividend—a dividend that is passed along to the holders of the mutual fund. These businesses own, manage, and develop office buildings, hotels, hospitals, and other types of real estate.
VGSLX’s growth is reflected in the mutual fund price, which is based on increases in the value of the properties owned. The dividend is distributed every three months.
There are more than 150 real estate companies within VGSLX. A few of the top holdings are Simon Property Group Inc (NYSE:SPG), Equinix REIT Rg (NASDAQ:EQIX), and Public Storage (NYSE:PSA). VGSLX also offers a higher dividend yield than the average yield on a mutual fund.