High-dividend mutual funds can become a reliable source of regular income. They are used to diversify a portfolio alongside real estate investment trusts, annuities, and other vehicles to invest in.
To invest in dividend ETFs is generally more cost-effective regarding expense ratio. However, mutual funds have several advantages compared to them. Some investors value the ability to select an actively managed fund to maximize yield. Others appreciate the convenience of automatic dividend reinvestment.
Below is a list of the top dividend mutual funds tailored to various strategies to invest.
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A closer look at some of the top dividend mutual funds for yield-seeking investors
Such funds make a significant contribution to the overall shareholders’ yield. From 1926 to 2023, they accounted for almost one-third of the growth of the S&P 500 total return index.
However, there is always the possibility that an individual company may decide to stop dividend distributions. To reduce the risk of income loss, diversification is employed. One of the simplest ways to achieve a balanced portfolio of stocks is to invest in mutual funds.
A mutual fund pools the capital of many investors. The fund managers invest this money according to an approved strategy. For example, this strategy may focus on growth or maximizing current dividend income.
There is also a middle-ground option. For instance, the Federated Hermes Strategic Value Dividend Fund invests in value stocks, but specifically those that offer a dividend yield above the market average.
Individual stocks within a mutual fund’s net assets generate income in the form of cash dividends. The fund does not reinvest this money but distributes it among the holders of its shares. Typically, mutual funds pay dividends quarterly. If the fund holds bonds, it receives and distributes coupon income.
There are two types of such alliances. The first is a passive fund. It copies a certain stock index, such as the NASDAQ US Dividend Achievers Select Index or the Dow Jones U.S. Select Dividend Index.
The second type is an active fund. In this case, the manager independently selects stocks and determines the timing of trades. Such funds typically have a higher expense ratio.
The best high-dividend mutual funds
Below is a list of the best dividend mutual funds and stocks that pay regular dividends. They have been selected based on key metrics.
Funds that pay the highest dividends are not always the optimal choice. Therefore, the selection includes not only assets with maximum income. People with a long investment horizon will find options here that contribute to capital growth and passive income.
The data on the dividend yield are given as of December 11, 2024
1. T. Rowe Price Dividend Growth Fund (PRDGX)
T. Rowe Price Dividend Growth Fund is an actively managed fund that specializes in promising sectors of the economy. Among the largest holdings are large-cap companies such as Microsoft Corp. and Apple Inc.
Key information about PRDGX:
- Annual dividend (yield): $0.79 (0.95%)
- ER: 0.64%
- Net Assets: $25.87B
- 30-day sec yield: 1%
The strategy involves investing in stocks with a strong dividend history and high dividend growth potential. PRDGX used to invest in companies that increase their dividends each year. Most of these companies also have capital appreciation potential. Such mutual funds offer a balance between dividend income and long-term capital appreciation.
Minimum investment amount is $2500. When investing in an IRA, the amount is $1000. On the stock exchange, there is a dividend ETF that is an equivalent to this open-end fund. It also provides regular dividend income. This is the Dividend Growth ETF (TDVG). Benefits include no minimum investment requirement and a lower expense ratio (0.5%).
2. Vanguard Dividend Appreciation Index Admiral Shares (VDADX)
Vanguard Dividend Appreciation Index Admiral Shares is a low-cost mutual fund. The top three sectors are technology, finance, and healthcare. All companies are characterized by financial stability. They pay dividends to shareholders, increasing dividends for many years.
Key information about VDADX:
- Dividend (yield): $0.9 (1.63%)
- ER: 0.08%
- Net Assets: $106.01 B
- 30 days sec yield: 1.66%
The strategy is to track the S&P U.S. Dividend Growers Index TR. This allows for the gradual increase in dividend payment and capital. VDADX stocks have a Beta coefficient of 0.84. They are good to invest in when looking for assets with volatility below the market average.
Minimum entry threshold – $3000. The main advantage of the fund is its low expense ratio. At the same time, VDADX has been raising dividends for 9 years.
3. Vanguard Dividend Growth Investor Shares (VDIGX)
VDIGX used to invest in stocks of financially stable companies that pay dividends and consistently increase them. It is diversified across all sectors of the economy. The leading position in its net assets is held by healthcare. This is followed by technology and industrial sectors.
Key information about VDIGX:
- Dividend: $0.66 (1.61%)
- Expense ratio: 0.29%
- Net Assets: $53.76B
- 30 days sec yield: 1.62%
The strategy is the aspiration to increase capital. The fund consists of 42 stocks. Among them are both value companies and growth companies. However, all of them have a good history of payout to shareholders. They grow their dividends over time.
The minimum investment threshold is $3000. The fund’s expenses are more than 2 times lower than the average for competitors.
4. Fidelity Floating Rate High Income Fund (FFRHX)
FFRHX is a bond fund. The portfolio primarily consists of securities with floating interest rates. It also includes high-yield debt instruments from issuers with high credit risk.
Key information about FFRHX:
- Dividend: $0.70 (7.53%)
- ER: 0.75%
- Net Assets: $15.12B
- 30 days sec yield: 7.29%
The strategy is to achieve maximum income right now. FFRHX offers the highest dividend yields among the open-end funds considered. The stock is suitable for investors who focus exclusively on cash flow, such as retirees.
FFRHX stocks do not provide capital appreciation, but they can be used to reduce the volatility of a portfolio. The beta coefficient is 0.18.
5. PGIM High Yield Fund (PBHAX)
PBHAX is a bond fund that works with securities rated low. Most of the assets have a rating of BB or lower from Standard & Poor’s. Such investments are associated with the risk of issuer bankruptcy. The main sectors are Energy and Basic Materials.
Key information about PBHAX:
- Dividend: $0.32 (6.55%)
- ER: 0.74%
- Net Assets: $19.43B
- 30 days sec yield: 6.39%
The strategy is to achieve maximum current income. Capital appreciation is a secondary goal. It is possible with a decline in interest rates and an increase in the value of the bonds held by the fund.
PBHAX is not suitable for conservative investors. It has a Beta coefficient of 0.87 and a Morningstar Risk Rating of Above Average. These are high indicators for bond funds.
6. Cohen & Steers Preferred Securities and Income Fund (CPXFX)
CPXFX operates with bonds and preferred stocks with consistent dividends. The latter provide fixed income like debt securities but are equity. The fund focuses on the financial sector. Within its net assets are the securities of banks, insurance companies, and other institutions.
Key information about CPXFX:
- Dividend: $0.69 (5.53%)
- ER: 1.14%
- Net Assets: $7.93B
- 30 days sec yield: 4.49%
The strategy is obtaining maximum residual income. Preferred dividend stocks usually provide higher yields than regular ones. In addition, the likelihood of dividend payouts being canceled is significantly lower. The fund is not suitable for investors aiming for gains.
The key drawback is high expense ratios. The advantage is the absence of a minimum entry threshold.
7. American Funds Conservative Growth and Income Portfolio (INPFX)
This fund combines the desire for high yield and capital growth. It used to invest equally in stocks and bonds. However, it does not buy securities directly. Its assets consist of shares of other funds. INPFX is interesting from the perspective of diversification. Nearly a quarter of its assets are in companies registered outside the U.S.
Key information about INPFX:
- Dividend: $0.48 (3.53%)
- ER: 0.65%
- Net Assets: $8.01B
- 30 days sec yield: 3.42%
The strategy is a moderate capital growth with a presence of residual income. A dividend yield of 3.53% makes INPFX attractive for investors seeking additional cash flow.
The key drawback is the additional expenses. In fact, investors pay management fees twice. The advantage is the low entry threshold. It is only $250 when purchasing fund shares in an IRA account – $25.
FAQ
What is the best dividend fund?
In addition to the best dividend funds listed, one can mention the Vanguard Equity Income Fund Investor Shares (VEIPX). This is a low-cost open-end fund with an expense ratio of only 0.27%. Its strategy focuses on dividend growth and diversification across all sectors.
Are high dividend mutual funds a good investment?
High-yield funds are a good investment for people interested in residual income. A dividend mutual fund also benefits long-term investors aimed at reducing portfolio volatility.
How do I choose a dividend mutual fund to invest in?
When trying to find best dividend ETFs or open-end funds, it is important to consider the composition of their net assets and investment strategy. Key metrics to pay attention to include the funds’ expense ratio, dividend growth rates, and yield.
What are the disadvantages of dividend mutual funds?
Many dividend funds have the disadvantage of a higher expense ratio than exchange-traded funds (ETFs). For example, the expense ratio of the Vanguard High Dividend Yield ETF is 0.06%. The expense ratio of the Vanguard High Dividend Yield Index Fund Admiral Shares is 0.08%. Although both track the performance of the FTSE High Dividend Yield Index, open-end funds used to pay capital gains annually. This leads to additional tax liabilities for investors.
