Dividend funds can be used wisely at any time in an investor’s life. In fact, many investment professionals advise that the best funds to buy are those that invest in stocks that pay dividends.
Although investors looking for dividend funds often seek out the highest yields, there are other factors to consider for finding the best funds.
For our list of best dividend funds, we include only no-load mutual funds with low expense ratios. For some investors, it may come as no surprise that the funds making our list are split between the mutual fund companies, Vanguard and Fidelity.
Why Invest in Dividend Funds?
Many investors buy dividend stocks or dividend funds for the purpose of receiving a steady stream of income that comes from the dividend payments, which typically occur on a quarterly basis. This makes dividend funds an appropriate investment for retired investors.
However, some investors choose to reinvest the dividends, sometimes referred to as a dividend reinvestment program, or DRIP. When dividends are reinvested, the dividends are used to buy more shares of the investment, rather than paid to the investor.
Some investors also like to use mutual funds that pay dividends in economic environments where bond mutual funds are not attractive. For example, when interest rates are low but economic conditions are generally good, bond funds can have lower yields than dividend mutual funds.
10 Best Dividend Funds for Any Investor
All of these dividend funds from Vanguard and Fidelity are low-cost, no-load funds. However, the funds have slightly different styles, each of which may have its own appeal to investors. In no particular order, here are 10 of the best dividend funds for almost any investor.
Vanguard International High Dividend Yield Index (VIHIX) is a passively managed fund that tracks the FTSE AW ex-US High Dividend Yield Index, which is a cap-weighted index consisting of 800 stocks of international companies that are expected to have above-average dividend yields. VIHIX offers exposure to developed and emerging economies outside the U.S. and the fund’s style is large-cap value. The minimum initial investment to buy VIHIX is $3,000 and the expense ratio is 0.42 percent or $42 for every $10,000 invested.
Vanguard High Dividend Index (VHDYX) is ideal for investors looking for income now with high yields for stocks. The portfolio consists primarily of large-cap value stocks of companies in the United States that pay high dividends compared to similar companies. The expense ratio for VHDYX is extremely low 0.15 percent or $15 for every $10,000 invested, and the minimum initial purchase is $3,000.
Vanguard Utilities Index (VUIAX) focuses on stocks in the utility sector, which is highly sought for its high dividends. The portfolio holdings consist of large-cap U.S. stocks of utility companies, such as Duke Energy Corporation (DUK) and Southern Co (SO). The expense ratio for VUIAX is an attractively low 0.10 percent or $10 for every $10,000 invested. However, keep in mind that this mutual fund is only offered in Vanguard Admiral share class, which has a minimum initial purchase of $100,000. There is no minimum purchase of the ETF version of the fund (ticker: VPU), which has the same expense ratio.
Vanguard High-Yield Corporate Fund (VWEHX) is actively managed; therefore, you won’t find an ETF version of this fund. Typical high-yield bond funds will hold low credit quality bonds, also known as junk bonds, but the manager of this fund seeks bonds that are on the higher range of the credit quality compared to the average high-yield bond fund. So, you might say that the bonds in VWEHX aren’t as “junky” as other junk bond funds—investors can get the yield without quite as much risk compared to other high-yield funds. The expense ratio for VWEHX is 0.23 percent or $23 for every $10,000 invested, and the minimum initial purchase is $3,000.
Vanguard High-Yield Tax-Exempt Fund (VWAHX) is a mutual fund that can provide income while generating little to no taxes. Because it holds municipal bond funds, the income is not taxable at the federal level. Investors buying tax-exempt funds like VWAHX are typically high-income individuals with taxable accounts. Expenses for VWAHX are just 0.19 percent or $19 for every $10,000 invested, and the minimum initial purchase is $3,000.
Vanguard Real Estate Index (VGSIX) is a good way for investors to gain access to the real estate sector, which is known for its consistent dividend payouts and the fund is among the best to buy in this category. Although rising interest rates can put downside pressure on returns for real estate investment trusts, a low-interest-rate environment can keep borrowing costs low for home buyers and developers. Expenses for VGSIX are 0.26 percent, or $26 for every $10,000 invested.
Fidelity Equity Income (FEQIX) is a solid fund that puts up average performance but above-average yields. The fund holds mostly U.S. large-cap value stocks. The expense ratio for FEQIX is a low 0.67 percent and the minimum initial purchase is $2,500.
Fidelity & Equity Dividend Income (FEQTX) is another Fidelity fund that doesn’t typically lead category peers in performance but is reliable for generating income with dividends. The portfolio allocation is about 90 percent U.S. stocks and 10 percent foreign stocks. The presence of mid-cap stocks, in addition to large-caps, gives FEQTX a bit of an aggressive edge. The expense ratio for FEQTX is low at 0.72 percent and the minimum initial purchase amount is $2,500.
Fidelity Strategic Dividend & Income (FSDIX) is one of the best dividend funds in the Fidelity lineup. The portfolio consists of about two-thirds large-cap U.S. large-cap stocks and the remainder of the holdings are allocated among foreign stocks, bonds, cash, and convertible securities. The expense ratio for FSDIX is low at 0.78 percent and the minimum initial purchase is $2,500.
Fidelity Capital & Income (FAGIX) is a balanced fund that can provide diversification while combining qualities of growth and income. The FAGIX portfolio consists of roughly 20 percent stocks, 70 percent bonds, and 10 percent cash. The equity side is mostly growth stocks like Alphabet (GOOG), Skyworks (SWKS), and Ally Financial (ALLY) and the fixed income mix consists primarily of high-yield bonds. Expenses are 0.73 percent.
The information on this site is provided for discussion purposes only, and should not be misconstrued as investment advice. Under no circumstances does this information represent a recommendation to buy or sell securities.