The Right Dividend Fund for You

Dividend stock strategies come in many different flavors. Here’s what to look for.

- Adam Shell

IF YOU’RE SHOPPING FOR A dividend-stock fund, do what you do when you buy cereal: Look at what’s inside the box (or the portfolio, in this case) so that you know exactly what you’re getting. You can’t assume that just because a fund has dividend in its name (as hundreds do) that it will closely resemble and perform similarly to other dividend funds, or that it will be a good fit for your investment goals. “There are a lot of different flavors and a huge dispersion of strategies,” says Sean Bandazian, an analyst at Cornerstone Wealth.

Dividends have a long history of adding to a stock’s total return. The ability to pay a dividend is “a signal of a company’s strength,” says Alec Lucas, an investment strategist at Morningstar. Since 1926, dividends have contributed about one-third (32%) of the total return for the S&P 500, with the remainder coming from capital appreciation or rising stock prices, according to S&P Dow Jones Indices.

But just as cereals have different amounts of sugar, sodium and vitamins, dividend funds (even ones with essentially identical names) hold different types of dividend-paying stocks and have different sector exposures. The funds also have disparities in their fees and stock-selection criteria, depending on whether a fund is run by a stock picker or tracks an index.

The first order of business when selecting a fund is to define your goal. “Do you need to live off the dividend and turn it into a paycheck?” asks Rob Leiphart, vice president of financial planning at RB Capital Management. Or are you looking more for growth and income?