Dividend-paying stocks distribute regular dividends to shareholders in the form of cash, common stock, or other properties. Investing in mutual funds that hold dividend-paying stocks can provide a steady stream of income to investors, as well as potential long-term returns. It may also help buffer market fluctuations—called volatility.

The following three mutual funds hold dividend-paying stocks that typically invest in equities of large corporations with a history of steady dividend payments. Also, these funds contain fairly low expense ratios, making them solid choices for any investor.

Key Takeaways

  • Dividend-paying stocks distribute regular dividends to shareholders in the form of cash, common stock, or other properties. 
  • The Vanguard Value Index Fund Admiral Shares (VVIAX) has a 2.55% SEC yield and invests in equities of large U.S. companies.
  • The Vanguard Equity Income Fund Investor Shares (VEIPX) has a 2.67% SEC yield and invests in stable, consistent dividend payers.
  • The Fidelity Equity Income (FEQIX) holds mainly stocks of large U.S. corporations and has a 1.94% SEC yield.

1. Vanguard Value Index Fund Admiral Shares (VVIAX)

The Vanguard Value Index Fund Admiral Shares (VVIAX) invests in equities of U.S. companies that are considered large corporations. According to Vanguard, the fund is a buy-and-hold investment, and the stocks within the fund might be undervalued relative to the rest of the stock market.

In other words, some of the stocks might appreciate at a slower pace, underperforming the market. Still, since they’re well-established companies, they typically are less risky than growth stocks or smaller companies. The fund requires a minimum investment of $3,000 and has a 2.55% SEC yield—as of November 30, 2020—with an expense ratio of 0.05%—as of April 28, 2020.

For review, the SEC yield is a metric mandated by the U.S. Securities and Exchange Commission (SEC) for measuring and comparing dividend returns. The yield provides investors with a consistent metric for all funds so that dividend-paying or yield-based funds can be compared more easily.

Some of the top sectors and their weighting within the fund—as of November 30, 2020—are as follows:

The Vanguard Equity Income Fund Investor Shares holds 329 stocks that amount to $93.6 billion in total net assets. Some of the top holdings in the VVIAX include:

  • Walmart Inc.
  • Berkshire Hathaway Inc.
  • Johnson & Johnson
  • JPMorgan Chase & Co.
  • Procter & Gamble Co.
  • Walt Disney Co.
  • Verizon Communications Inc.

As with any fund that invests in equities, there is a risk that the prices of the holdings could decline, wiping out any gains from the dividends.

2. Vanguard Equity Income Fund Investor Shares (VEIPX)

The Vanguard Equity Income Fund Investor Shares (VEIPX) was issued in 1988 and seeks to provide exposure to dividend-paying stocks across many industries. According to Vanguard, the VEIPX is designed to provide investors with exposure to the stock market and an above-average level of income.

The VEIPX invests in equities of consistent dividend payers, which can help boost the fund's dividend yield versus other mutual funds. However, the emphasis is on slower growing, stable companies, which means the fund may underperform versus other mutual funds in a bull market. The VEIPX is ideal for investors with a long-term investment horizon but can tolerate market fluctuations or volatility.

The VEIPX requires a minimum investment of $3,000 and has a 2.67% SEC yield as of November 30, 2020. The expense ratio is 0.27% as of January 31, 2020.

Some of the top sectors and their weightings—as of November 30, 2020—within the fund are as follows:

  • Consumer Staples: 13.60% 
  • Financials: 19.80%
  • Health Care: 17.60%
  • Industrials: 11.10%
  • Information Technology: 10.60%

The Vanguard Equity Income Fund Investor Shares holds 185 stocks that total nearly $38.8 billion in net assets. Some of the fund's largest holdings include:

  • JPMorgan Chase & Co.
  • Procter & Gamble Co.
  • Comcast Corp.
  • Cisco Systems, Inc.
  • Pfizer Inc.
  • Verizon Communications Inc.
  • Bank of America Corp.
  • Coca-Cola Co.

Similar to many mutual funds that hold only dividend-paying stocks, the Vanguard Equity Income Fund Investor Shares carries a moderate to a high degree of risk.

3. Fidelity Equity Income (FEQIX)

The Fidelity Equity Income (FEQIX) holds mainly stocks of large U.S. corporations. According to Fidelity, the FEQIX seeks reasonable income that exceeds the yield on all of the securities within the S&P 500 index. The fund managers also consider holdings with the potential for capital appreciation. Typically, 80% of the assets are invested in equities.

The FEQIX has no minimum investment requirement and has a 1.94% SEC yield as of November 30, 2020. The expense ratio is 0.60% as of March 31, 2020.

Some of the top sectors and their weighting—as of November 30, 2020—within the fund are as follows:

  • Financials: 18.15%
  • Health Care: 13.38%
  • Industrials: 11.71%
  • Consumer Discretionary: 10.84% 
  • Information Technology: 10.64%

The Fidelity Equity Income fund has 124 holdings—as of September 30, 2020—that amount to $6.4 billion in total net assets as of November 30, 2020.

Some of the top holdings in the FEQIX include:

  • Walmart Inc.
  • Johnson & Johnson
  • JPMorgan Chase & Co.
  • Walmart Inc.
  • Walt Disney Co.
  • McDonald's Corporation
  • Apple Inc.
  • Microsoft Corporation

Before investing, investors should consider their risk tolerance and long-term financial objectives. Any fund, including dividend or income funds, has the potential for losses. Please consult a financial advisor before making any investment decision.