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?
Many investors, especially retirees, opt for higher-yielding stocks for two key reasons: to generate steady income and to provide downside protection in declining markets. Others prefer a dividend-growth strategy, which is designed to increase your income stream over time and outpace inflation. Dividend growth funds target companies with bright prospects for increasing their payouts but not necessarily the ones with the highest yields.
Below, we’ll show you some of the ways that dividend funds can differ and offer tips on picking a fund that matches your goals. Prices and other data are through January 7.
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