Reinvestment, in which the generated interim income is reinvested back into the investment, is known to increase long-term returns. However, some investors opt to receive periodic payments from their investments, depending on their specific needs. Periodic coupon or interest payments from bonds, which are debt instruments, and regular dividends, which are cash payments from stocks and mutual funds, can offer investors a steady stream of income. In this article, we explore eight of the best dividend mutual funds, which are known to pay dividends regularly.
- Many mutual funds offer aggregate dividends from multiple stocks that are either reinvested or paid out to account holders.
- Dividend funds are paid out after fees, meaning the best dividend mutual funds should have low expense ratios and high yields.
- Dividend-paying mutual funds tend to focus on large, well-established companies with a strong track record of paying dividends or are expected to increase their dividend payments.
How Do Mutual Funds Pay Dividends?
Mutual funds often contain a basket of securities including equities or stocks, which may pay dividends. Dividends are paid to shareholders at different times. Mutual funds following a dividend reinvestment plan, for example, reinvest the received dividend amount back into the stocks. Other funds follow the dividend payment plan by continuing to aggregate dividend income over a monthly, quarterly, or sometimes six-month period, and then making a periodic dividend payment to account holders.
A fund pays income after expenses. If a fund is getting regular yield from the dividend-paying constituent stocks, those expenses can be covered fully or partially from dividend income. Depending on the local laws, dividend income may be tax-free, which can add to an investor's overall return.
Investors should also note that companies are not obliged to make dividend payments on their stocks, meaning dividends are not guaranteed. Investors looking for dividend income may find dividend-paying mutual funds a better bet than individual stocks, as the latter aggregates the available dividend income from multiple stocks. A mutual fund also helps with diversifying risk from depreciating stock prices since the money invested is spread between dozens of companies.
Top Dividend-Paying Mutual Funds
Here are the best mutual funds that pay high-dividend yields. A useful benchmark for gauging the dividend-paying performance of a fund is to compare the mutual fund yield against the yield of the benchmark S&P 500 index.
Please note that any fund that invests in stocks, bonds, or other securities can realize gains in losses due to the price movements of the holdings. Although the market gains can lead to enhanced capital gains in addition to the SEC yield, market losses can also occur. These losses can be so significant that the SEC yield can not only be wiped out but also a loss of the initial investment is possible.
1. The Vanguard High Dividend Yield Index Admiral Shares (VHYAX)
VHYAX is an index fund that attempts to replicate the performance of the FTSE High Dividend Yield Index. This index contains stocks of companies, which usually pay higher than expected, or greater than average, dividends. Being an index fund, the VHYAX replicates the benchmark stock constituents in the same proportion. This fund has maintained a consistent history of paying quarterly dividends since its inception on Feb. 7, 2019.
Being an index fund, this has one of the lowest expense ratios of 0.08% and SEC yield was 2.75%. The fund has a $3,000 minimum investment requirement. It may be a perfect low-cost fund for anyone looking for higher than average dividend income.
For investors looking for a lower minimum investment requirement, Vanguard offers this fund as an exchange traded fund (ETF), which has many similar characteristics. The ETF version is called the Vanguard High Dividend Yield ETF (VYM).
2. The Vanguard Dividend Appreciation Index Admiral Shares (VDADX)
VDADX is an index fund, which attempts to replicate the performance of the benchmark NASDAQ US Dividend Achievers Select Index. This unique index consists of stocks that have been increasing the dividend payouts over time. Being an index fund, VDADX replicates the benchmark stock constituents in the same proportion. This fund is also a consistent payer of quarterly dividends since its inception date of Dec. 19, 2013.
The VDADX also has one of the lowest expense ratios of 0.08% and an SEC yield of 1.65%. The fund has a $3,000 minimum investment requirement.
For investors looking for a lower minimum investment requirement, Vanguard offers this fund as an ETF, which has many similar characteristics. The ETF version is called the Vanguard Dividend Appreciation ETF (VIG).
3. The Columbia Dividend Opportunity Fund (INUTX)
Columbia's INUTX focuses on delivering dividends by investing in the stocks of companies that have historically paid consistent and increasing dividends. The fund offers a diversified portfolio of holdings that include common stocks, preferred stocks, and derivatives for both U.S. and foreign securities of various sized companies.
The INTUX has an expense ratio of 1.05% and an SEC yield of 1.96%. The fund's inception date was Aug. 1, 1988, and also has a $2,000 minimum investment requirement.
4. The Vanguard Dividend Growth Fund (VDIGX)
The Vanguard Dividend Growth Fund (VDIGX) primarily invests in a diversified portfolio of large-cap (and occasionally mid-cap) U.S. and global companies, which are undervalued relative to the market and have the potential for paying dividends regularly. The fund research attempts to identify companies that have high earnings growth potential leading to more income, as well as the willingness of company management to increase dividend payouts.
The VDIGX has an expense ratio of 0.26% and an SEC yield of 1.48%. The fund's inception date was May 15, 1992, and also has a $3,000 minimum investment requirement.
5. The T. Rowe Price Dividend Growth Fund (PRDGX)
Based on the principle that increasing dividends over a period are positive indicators of a company’s financial health and growth, PRDGX looks to invest in mostly stocks of large companies with some mid-sized companies mixed in. The fund seeks companies that have a strong track record of paying dividends or that are expected to increase their dividends over time.
The PRDGX contains mostly stocks of large U.S. companies that pay quarterly dividends. The PRDGX has an expense ratio of 0.63%. The fund's inception date was Dec. 30, 1992, and has a $2,500 minimum initial investment requirement.
6. The Federated Strategic Value Dividend Fund (SVAAX)
For investors who are not satisfied with quarterly dividends, the SVAAX from Federated offers monthly dividends. The fund's investment strategy includes generating income and long-term capital appreciation by focusing on higher-dividend-paying stocks than that of the broader equity market. The fund also seeks out companies with dividend growth potential and the fund is primarily benchmarked to the Dow Jones U.S. Select Dividend Index.
The SVAAX contains mostly stocks of large U.S. companies with some foreign securities. The SVAAX has an expense ratio of 1.06% and an SEC yield of 3.21%. The fund's inception date was March 30, 2005, and has a $1,500 minimum initial investment requirement.
7. The Vanguard Equity Income Fund Investor Shares (VEIPX)
The VEIPX from Vanguard focuses primarily on established U.S. companies that are consistent dividend payers. The fund's holdings tend to be slow-growth but high-yield companies. As a result, the stock price gains may be limited when compared to other funds. This fund pays regular quarterly dividends and has an inception date of March 21, 1988. The VEIPX has an expense ratio of 0.28% and an SEC yield of 2.24%. The VEIPX has a $3,000 minimum investment requirement.
8. The Neuberger Berman Equity Income Fund (NBHAX)
The NBHAX looks to earn dividend income and capital appreciation by investing in high dividend-paying equities that include common stocks, utilities, real estate investment trusts (REITs), convertible preferred stock, convertible securities such as bonds, and derivative instruments like call and put options.
The fund's inception date was June 9, 2008, and has a $1,000 minimum initial investment requirement. It pays dividends with an SEC yield of 1.50% and has an expense ratio of 1.06%.
The Bottom Line
A company's dividend payments are typically paid from the company’s retained earnings, which represent the saved profit from prior years. However, companies may be better off reinvesting the dividend money back in the business, leading to higher revenue and an appreciation of their stock prices.
Also, dividend payments limit the reinvestment gains due to compounding. Investors looking for regular dividend income should weigh both the benefits of dividend income with the limitations before investing in high dividend-paying mutual funds.