Dividend Mutual Funds Provide Protection From Complete Losers

Dividend Mutual FundsOne of the ways that beginning investors can encourage a certain amount of diversity in their portfolios is to invest in mutual funds.

There are a number of choices when it comes to mutual funds, but one way you can invest — and get a little extra back — is to make use of dividend mutual funds.

A dividend mutual fund is one that specifically aims to include investments that pay dividends.

Mutual Fund Basics

A mutual fund is basically a collection of investments. The fund chooses certain investments, and when you invest in the fund, you get a piece of each investment held by the fund. It provides a way for you to diversify your portfolio without having to do a lot of stock picking.

Many mutual funds do have different purposes. Index mutual funds invest in everything held on specific indexes. There are also industry specific mutual funds (which can limit your diversity), money market mutual funds, as well as mutual funds that hold bonds or other investments besides stocks. And there are dividend mutual funds that invest in dividend paying investments, allowing you to boost your earnings.

Dividend Paying Investments

Dividend paying investments are those that provide a little extra money. In the case of dividend paying stocks, every so often (usually each quarter, but it can be monthly or annually) a company will take a portion of its profit and distribute it among its shareholders.

If you own stock in a company that pays dividends, this is extra money that you receive just for owning shares. You can spend it as you like (but remember you have to pay taxes on it). Many companies have reinvestment plans that allow you to automatically use dividends to buy more stock. This is like getting free shares.

With dividend mutual funds, the idea is the same. Every so often, the investments in the fund pay dividends, and the fund then distributes them to those who invest in the mutual fund. Many dividend mutual funds, though, simply use the dividends to help you buy more shares of the mutual fund, boosting your holdings — and your potential earnings.

Considering Dividend Mutual Funds

Beginning investors (and others) might do well to consider dividend mutual funds for their portfolios. It is true that many dividend paying stocks don’t experience the kind of short-term returns that you can see with growth stocks, but in many cases a dividend paying investment is one that is solid, offering regular profits.

While you won’t see huge returns, you won’t be subject to the same risk of loss. You are likely (but never guaranteed) to see regular, if modest, returns. Between the years of 1975 and 2009, the MSCI World Index offered an inflation-adjusted, average total annual return of 6.9%. Of this return, 2.9% was accounted for by dividends. This is a fairly significant chunk.

While capital gains accounted for 4%, it is worth noting that with dividend investments you get to take a little piece of each side of the gains.

Mutual funds provide you a way to start investing without having to risk a great deal on any one stock. Stock picking is not as easy as it seems, and if you choose a dud, you could regret it. At least with a mutual fund you are spreading the risk a bit.

If a few investments in the fund tank, there are likely to be winners that make up for it. In Dividend mutual funds, the nature of dividend paying investments helps protect you further from complete losers. Plus, you get the added bonus of extra money every quarter — money that can be used to boost your returns.



Last Edited: March 16, 2012 @ 1:36 am

Comments

  1. This is great piece! I haven’t really partaken in dividend payouts on my index mutual funds since I am still in my 20s, but this is something that would be very important as I get towards the later stage of my investing career!

  2. Habeeb Jiwani says:

    Great article. Purchasing a diversified mutual fund allocated to stocks and bonds with dividend yielding stocks with a low management expense ratio of less than 0.75% is the right way to go.
     
    Purchasing dividend paying mutual funds eliminates the need to identify a handful of dividend paying stocks & provides instant diversification across a whole basket of stocks. Usually, dividend paying mutual funds have 100s or more basket of stocks spread across various sectors such as Energy & Gas, Banking, Real Estate Investment Trusts (REIT), Telecommunications, Utilities, etc.
     
    Over the last 25 years, the S&P 500 Index has gained 914%. If you add re-invested dividends, it soars to 2000%. This is the concept of the “total return.”  The other advantage of dividends is the tax implications.
     
    Interest gained from a Guaranteed Investment Certificate (GIC) at your local bank is taxed at your income tax bracket, which can be as high as 35%. Qualified dividends however are taxed at lower long term capital gains rates, which is 15% for most investors.