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Reinvestment is known to increase long-term returns. When you reinvest your money, the interim income you generate is put back into the investment. But 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 that regularly pay dividends regularly.
Key Takeaways
- 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 that 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 that 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. For instance, mutual funds that follow a dividend reinvestment plan (DRIP) 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, then making a periodic dividend payment to account holders.
A fund pays income after expenses. If a fund gets a regular yield from the dividend-paying constituent stocks, those expenses can be covered fully or partially by dividend income. Depending on 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 that 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 invested money is spread among dozens of companies.
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 with the yield of the benchmark S&P 500 index. The 30-day SEC yield is a standard measurement in the industry mandated by the U.S. Securities and Exchange Commission (SEC) to help investors compare funds before investing.
1. Vanguard High Dividend Yield Index Admiral Shares (VHYAX)
Vanguard's High Dividend Yield Index Admiral Shares is an index fund that attempts to replicate the performance of the FTSE High Dividend Yield Index. This index contains stocks of companies that usually pay higher-than-expected or greater-than-average dividends. Being an index fund, 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, the VHYAX has one of the lowest expense ratios—0.08%, as of Feb. 27, 2023—and its SEC yield was 3.06%, as of July 31, 2023. 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. Vanguard Dividend Appreciation Index Admiral Shares (VDADX)
The 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 their dividend payouts over time. Being an index fund, the 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.
VDADX also has one of the lowest expense ratios. Like VHYAX, it only charges 0.08% as an expense ratio with an SEC yield of 1.76%, as of July 31, 2023. 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. Columbia Dividend Opportunity Fund (INUTX)
Columbia Threadneedle Investments’ Dividend Opportunity Fund 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.
INUTX has an expense ratio of 1.06%, and an SEC yield of 2.30%, as of June 30, 2023. The fund’s inception date was Aug. 1, 1988, and it has a $2,000 minimum investment requirement.
4. Vanguard Dividend Growth Fund (VDIGX)
The Vanguard Dividend Growth Fund primarily invests in a diversified portfolio of large-cap (and occasionally midcap) U.S. and global companies that 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.
VDIGX has an expense ratio of 0.30% and an SEC yield of 1.58%, as of July 31, 2023. The fund’s inception date was May 15, 1992, and it has a $3,000 minimum investment requirement.
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 not only can the SEC yield be wiped out, but a loss of the initial investment is also possible.
5. 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, the T. Rowe Price Dividend Growth Fund looks to invest mostly in stocks of large companies, with some midsized companies folded into the mix. The fund seeks companies that have a strong track record of paying dividends or that are expected to increase their dividends over time.
PRDGX contains mostly stocks of large U.S. companies that pay quarterly dividends. It has an expense ratio of 0.64%. The fund’s inception date was Dec. 30, 1992, and it has a $2,500 minimum initial investment requirement.
6. Federated Strategic Value Dividend Fund (SVAAX)
For investors who are not satisfied with quarterly dividends, the Strategic Value Dividend Fund from Federated Hermes 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.
SVAAX contains mostly stocks of large U.S. companies, with some foreign securities. It has a net expense ratio of 1.06% and an SEC yield of 3.77%, as of June 30, 2023. The fund’s inception date was March 30, 2005, and it has a $1,500 minimum initial investment requirement.
7. Vanguard Equity Income Fund Investor Shares (VEIPX)
The Vanguard Equity Income Fund Investor Shares 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 compared with other funds.
VEIPX pays regular quarterly dividends and has an inception date of March 21, 1988. The fund has an expense ratio of 0.28% and an SEC yield of 2.62%, as of July 31, 2023. The fund requires a minimum investment of $3,000.
8. Neuberger Berman Equity Income Fund (NBHAX)
The Neuberger Berman Equity Income Fund 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. It has a $1,000 minimum initial investment requirement. It pays dividends with an SEC yield of 2.22%, as of June 30, 2023, and has an expense ratio of 0.71%.
Are Dividend-Paying Mutual Funds a Good Investment Idea?
Dividend-paying mutual funds give investors a chance to put their money into an investment vehicle the tends to perform well. They tend to offer great returns and low volatility while allowing investors to diversify their holdings. Dividend-paying companies that make up a mutual fund portfolio provide investors with a steady income stream and capital appreciation. But there are fees and initial investment minimums that investors should keep an eye on before purchasing shares.
What Is a DRIP?
A DRIP is an investment plan. Known as a dividend reinvestment plan, it allows people who receive dividends to use them to purchase more stock in the company. This allows the investor's investment in the company to grow over time.
How Do Dividends Work?
A dividend is a distribution made by a company to its shareholders—normally common shareholders. It represents a portion of the company's earnings. Dividends are distributed on a regular basis. They are most commonly paid quarterly, monthly, or annually. Recipients can take dividends as cash or they can reinvest them back into the company. Not all companies pay their shareholders a dividend. In fact, they are usually offered by more established corporations.
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 and the limitations of dividend income before investing in high-dividend-paying mutual funds.