With what feels like millions of options when it comes to investing, it’s tough to know what works for your financial situation and what doesn’t. Dividend income funds are a great option for those looking to take advantage of their savings and earn income. But what do you need to know about dividend income funds, and how do they work? We have you covered.
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Dividend Income Funds
The perfect option for those looking for income funds that pay out dividends, but don’t want to go through the process of selecting and managing a personal portfolio of stocks. It’s hard to know which stocks make sense and even harder to diversify against the risk of companies flopping or not paying dividends.
This is where dividend income funds come in.
When you choose to invest in a dividend income fund, you choose professional management and a team of seasoned experts to do the work for you. They’ll pick the stocks, collect proceeds on your behalf and pay them out to you on a monthly or quarterly basis.
The best dividend income funds have management teams that are familiar with the industries they’re investing in and who’ve been managing funds for a while.
Dividend And Income Mutual Funds
Income Mutual Funds are a type of mutual fund that distributes dividend income at regular intervals. Mutual funds are unique in that they contain a group of securities including equities and stocks. This provides great diversification.
There are two options for the dividends earned through mutual funds. You can opt for a mutual fund that offers a dividend reinvestment plan, which takes the dividends and reinvests them back in the fund. Or you can opt for a dividend payment plan which will provide the income to you.
The benefit of reinvesting your dividends is that there’s the potential to earn more interest on your capital.
Dividends are paid after expenses are covered, and there may be times when the dividend income is just enough to cover fund expenses.
Another crucial point is that dividends are not guaranteed on stocks. Companies may refuse to pay dividends at any point which means there’s the risk of not receiving income. Mutual funds work better in this case as they derive their dividend pool from a variety of companies and their stocks.
Dividend and Income Mutual Funds provide a variety of benefits and eliminate a lot of the downside of investing in one company.
Dividend Income Index Funds
Index funds are great for the same reasons that mutual funds are. Dividend income index funds are funds that focus on dividend income and represent some of the best ways to gain exposure to dividend-paying stocks. These dividend income funds work well for those who don’t have the time to research stocks or those who are looking to take advantage of professional management.
The Dividend Income Fund Prospectus
It’s important to look at rates, fees, and information on returns. The prospectus provides this in the form of graphs and tables to show examples of what you can expect. Distribution rates are also an important consideration, and you’ll want to read more on the rate rules and how the fund distributes dividends. Most funds pay out the proceeds collected which would make the distribution rate the same as the dividend yield of the stock.
Other funds may pay a certain amount of the income earned. This could be in the form of a return on the principal you invested or the loss on principal as well. Distribution rules determine when and how a fund might handle these situations so it’s important to ask questions and read up on these bits of information.
The Best Dividend Income Funds
Here’s a brief list of the top funds in this category. This list isn’t exhaustive and shouldn’t serve as a replacement for the help of a seasoned financial professional.
- The Vanguard High Dividend Yield Admiral Shares (VHYAX)
Vanguard offers great funds across their portfolio and this one is no exception. This investment tracks the performance of the FTSE High Dividend Yield Index. This index consists of common stocks from companies that pay dividends that are generally higher.
Morningstar gives this fund a score of 3 out of 5 stars for a 3-year outlook and 4 out of 5 stars for 5-year, 10-year, and overall timeframes.
- The Vanguard Dividend Appreciation Index Fund Admiral Shares (VDADX)
This fund tracks the performance of the S&P U.S. Dividend Growers index that measures the investment return of commons stocks of companies that have a record of increasing dividends over time.
Morningstar gives this fund 3 out of 5 stars for 3-year, 5-year, 10-year, and overall time frames and rates it with average returns and low risks across all the time frames.
- Federated Hermes Strategic Value Dividend Fund Class A Shares (SVAAX)
This fund offers monthly dividends and seeks long-term capital appreciation while providing income. The primary investment method for this fund targets common stock that offers dividend growth potential.
Morningstar rates this fund at two stars across all time frames and cites low risk and low return as the reason for this rating.
Should I Invest In A Dividend Income Fund?
The answer will depend on your goals and interest in earning monthly or quarterly dividends. Dividend income funds are offered in different fund formats which can further add to the decisions you make. There are always options in the world of investing and Commercial real estate investing is another great one for those who looking to diversify their portfolios.
And despite us diving in on a few income fund options, the best dividend income funds for your financial situation will depend on your needs and what you’re looking to get out of the fund.
A best practice is to consult your financial professional, think about your goals, and plan for your financial future. Keep in mind that not every fund is a good fit and there are risks trading income funds and growth funds alike.
When you’re ready to deep dive into the world of dividend income funds, get your professional guidance for your investment decisions from proven experts in financial services — Saint Investment Group. Contact our team for a free consultation and discover more ways to make your money for you today.
President of Saint Investment Group
Nic is a two decade seasoned expert in investing and capital raising, specializing in Real Estate and debt markets. With Saint Investment Group, he leads large-scale distressed asset purchases and innovative syndications for investors.