You may think you want dividend funds with the highest yields, but other factors go into finding the best funds.
Our list of best dividend funds includes only no-load mutual funds with low expense ratios. The funds that make our list are split between the mutual fund companies Vanguard and Fidelity, which are known to offer efficient pricing.
Why Invest in Dividend Funds?
Dividend stocks or funds supply a steady stream of income from dividend payments, which typically occur every quarter. This regularity makes dividend funds a good choice for retired investors.
However, those of any age can benefit. You can also choose to reinvest the dividends. This set-up is sometimes called a "dividend reinvestment program" or "DRIP." Reinvested dividends are used to buy more shares of the investment they come from.
You may also choose mutual funds that pay dividends in times when bond mutual funds are weak. For example, when interest rates are low, but economic conditions are generally strong, bond funds can have lower yields than dividend mutual funds.
10 Best Dividend Funds
All of these dividend funds from Vanguard and Fidelity are low-cost, no-load funds. Each fund has a slightly different style. You may want global investment or a fund with a special focus. In no special order, here are 10 of the best dividend funds for almost any investor.
Vanguard International High Dividend Yield Index is a passively managed fund that tracks the FTSE AW ex-U.S. High Dividend Yield Index. This is a cap-weighted index consisting of 800 stocks of international companies expected to have above-average dividend yields. VIHAX offers exposure to developed and emerging economies outside the United States, and the fund’s style is large-cap value. The minimum initial investment to buy VIHAX is $3,000, and the expense ratio is 0.28% or $28 for every $10,000 invested. VYMI is the equivalent exchange-traded fund (ETF) and can be opened for the price of one share.
Vanguard High Dividend Index is ideal for investors who are looking for income. The portfolio consists mainly of large-cap value stocks of companies in the United States that pay relatively high dividends. As of May 2021, the expense ratio for VHYAX is an extremely low 0.08%. That's $8 for every $10,000 invested. The minimum initial purchase is $3,000. The equivalent ETF is VYM, which has an expense ratio of 0.06% and can be opened for the price of one share.
Vanguard Utilities Index focuses on stocks in the utilities sector. This sector is highly sought after 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 Company (SO). As of May 2021, the expense ratio for VUIAX is an attractively low 0.10%. That's $10 for every $10,000 invested. However, this mutual fund is only offered in the Vanguard Admiral share class and has a high minimum initial purchase of $100,000. There is no minimum purchase of the ETF version of the fund, which trades under the symbol VPU and has the same expense ratio.
Vanguard High-Yield Corporate Fund is actively managed. 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." This fund's manager seeks bonds on the higher range of 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. You can get the yield without quite as much risk as other high-yield funds bring. As of May 2021, the expense ratio for VWEHX is 0.23%. That's $23 for every $10,000 invested. The minimum initial purchase is $3,000.
Vanguard High-Yield Tax-Exempt Fund (VWEHX) is a mutual fund that can provide income while generating low or no taxes. Because it holds municipal bond funds, the income is not taxable at the federal level. Buyers of tax-exempt funds like VWEHX are often high-income individuals with taxable accounts. As of May 2021, expenses for VWAHX are 0.23%. That's $23 for every $10,000 invested. The minimum initial purchase is $3,000.
Vanguard Real Estate Index is a good way for investors to gain access to the real estate sector, which is known for its steady dividend payouts. VGSLX is among the best to buy in this category. Rising interest rates can put downside pressure on returns for real estate investment trusts (REITs). A low-interest-rate environment can keep borrowing costs low for home buyers and developers. Because these are Admiral shares, a $3,000 minimum is required. Expenses for VGSLX are 0.12% as of May 2021. That's $12 for every $10,000 invested. The ETF trades under the symbol VNQ with an expense ratio of 0.12% for the price of one share.l
Fidelity Equity Income is a solid fund that puts up average performance but above-average yields. The fund holds mostly U.S. large-cap value stocks. As of May 2021, the expense ratio for FEQIX is 0.6%. There is no minimum investment.
Fidelity Equity Dividend Income doesn’t typically lead category peers in performance. Still, It is reliable for generating income with dividends. The portfolio allocation is about 85% U.S. stocks, 12% foreign stocks, and 2% cash and net other assets. The presence of mid-cap stocks, with large-caps, gives FEQTX a bit of an aggressive edge. As of May 2021, the expense ratio for FEQTX is low at 0.6%. There is no minimum initial purchase amount.
Fidelity Strategic Dividend & Income is one of the best dividend funds in the Fidelity lineup. The portfolio consists of about two-thirds U.S. large-cap stocks. The rest of the holdings are allocated among foreign stocks, bonds, cash, and convertible securities. As of May 2021, the expense ratio for FSDIX is low at 0.7%. There is no minimum initial purchase amount.
Fidelity Capital & Income is a balanced fund. It offers diversification and combines growth and income goals. As of May 2021, the FAGIX portfolio consists of roughly 20% equities, 66% bonds, 11% cash, and 3% bank debt. The top holdings included Ally Financial, Caesars Entertainment, and Bank of America. Expenses are 0.67%.
Frequently Asked Questions (FAQs)
What's a good dividend for a dividend fund?
To get a sense of what the average dividend rate is for stocks, look at a major stock index and see what kind of dividends it offers. SPY, the ETF that tracks the S&P 500 index, has an SEC yield of about 1.2%. DIA, which tracks the Dow Jones Industrial Average, has an SEC yield of about 1.57%. Therefore, any dividend that comes in above those rates could be considered above-average.
How do expenses affect the SEC dividend yield for mutual funds?
Expenses are subtracted from the dividend and interest payments when calculating the SEC yield. Therefore, you don't have to make any extra effort to account for expenses when comparing SEC yields for mutual funds.
What is "ex-dividend" for mutual funds?
Ex-dividend dates are the date by which you must own a mutual fund to receive the dividend payment. This is one of four dividend dates to know. There's also the declaration date, which is when dividends are announced. Then, the ex-dividend date occurs. Then, the record date marks down all the shareholders who are due payment. Finally, on the payment date, shareholders receive their dividend payment.
How do you choose between a dividend fund and a growth fund?
Dividend funds and growth funds have very different objectives, so your choice should reflect your investment goals. Growth funds aim to invest in relatively small companies that still have room to grow, and if they do, then you'll enjoy capital gains. Dividend funds are less focused on capital gains and instead invest in large, stable companies that are unlikely to grow significantly. In place of capital gains, these stable companies reward investors by sharing profits through dividends.
The Balance does not provide tax or investment advice or financial services. The information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk, including the possible loss of principal.