Are you looking for income from stocks? Do you really want to pick and choose those stocks one by one? It might be time to dive in and take a good look at dividend income funds. These funds do the work of choosing stocks for you. The fund owns a diverse group of stocks that pays dividends. It will collect the proceeds on your behalf and will pay them out to you, often on a monthly or other schedule.
Before you buy into an income fund, you can see the amount of income you will receive by looking at the fund’s distribution rate. This is similar to looking at a stock that pays dividends, where you can find the amount of income you would receive by looking at the stock’s dividend yield. Although similar, distribution rates and dividend yields are not the same, and you should know how they differ before you commit.
Distribution Rates on Dividend Income Funds
Before buying into one of these income funds, you should learn about the fund’s distribution rate rules. Some funds pay out just the proceeds they collect. That would make the fund’s distribution rate the same amount as the dividend yield on a stock.
Other funds have a rule that states they will pay a certain amount of income. This means there may be times where they will return the money you used to invest in the stock as part of the distribution. The principal returned could be earned on the sale of stock that has risen in price, or perhaps the fund was forced to sell the stock at a loss to fulfill its rules about the distribution rate. There is nothing wrong with that type of rule, but like any investment, you want to know how it works before you buy it.
Closed-end Dividend Income Funds
Some dividend income funds are closed-end funds. In one of these funds, a fixed amount of stocks are traded on the open market rather than being held and tracked for gains and losses. Before choosing a closed-end income fund, make sure you know the unique risks and pluses of closed-end funds. They do not work in the same way most open-end mutual funds work.
Some closed-end funds follow a dividend capture strategy. This means the fund buys stocks just before the ex-dividend date and sells the stock after the payment is made. Since most dividend-paying stocks pay gains quarterly, if the fund owned a static portfolio, it would capture four proceed payments a year. Instead, by rolling the stocks in the fund based on their ex-dividend dates, the fund is able to capture five payments a year, rather than four. This plan can result in a higher distribution rate. It can also result in capital losses or gains since this type of fund is quickly moving in and out of stocks.
Dividend Income Index Funds
Index funds are one of the smartest ways to invest if cost is being measured. Some index funds focus on owning dividend paying stocks. Dividend index income funds are one of the simplest ways to get exposure to dividend-paying stocks. They are great options for new investors or those who don't have the time or expertise to research stocks on their own.
Other Ways to Get Income From Stocks
If you are looking for an income fund because you want monthly income when you retire from your job, think about using a retirement income fund. Like a dividend income fund, these funds are designed to produce and pay out income on a routine basis. Instead of owning dividend-paying stocks, these funds own a diverse group of stocks and bonds that are manage to gain a long-term return that will allow the fund to pay out a set amount of income each month.