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The Best Dividend Mutual Funds to Watch Out For

The main goal of investing is to save money — whether in the short term or once you retire. Two main ideas come to mind when you want to invest in mutual funds or other financial securities: risk and return. Dividend mutual funds are financial instruments that most definitely involve risk and return. Here’s how to pick the best dividend mutual funds, and we’ll also suggest five of the best funds available on the market.

Quick Look: The Best Dividend Mutual Funds

  • Fidelity Equity Dividend Income Fund (FEQTX)
  • Vanguard Dividend Appreciation Index Fund Admiral Shares (VDADX)
  • Vanguard Dividend Growth Fund (VDIGX)
  • Vanguard High Dividend Yield Index Fund Investor Shares (VHDYX)
  • Fidelity Strategic Dividend & Income Fund (FSDIX)

Overview: What are Dividend Mutual Funds?

Dividend mutual funds are the same as a standard stock mutual fund, as they consist of bundles of company stocks. Dividend mutual funds only gather companies that pay out dividends. You can use your returns from the dividend mutual funds in two ways:

  • To pay out steady income on a consistent basis
  • To pay out with more shares of the respective company or fund

What to Look for in a Dividend Mutual Fund

The expense ratio, potential returns, risk, minimum investment and ratings are all important factors to analyze.

Expense Ratio

The expense ratio is what you pay per year to the fund for services. Let’s say an expense ratio is 2%.

Let’s analyze what this means.

Imagine you invest $100,000 for 20 years in a dividend mutual fund that has a 5% return per year and a 2% expense ratio.

If there was no expense ratio, you would have received $265,329.77 after 20 years. Because of the 2% expense ratio, you’ll only get $180,611 after 20 years. If the expense ratio is lower, at 1.9%, then the return after 20 years would be $184,150.67, around $3,500 more.

Potential Returns

Returns are obviously important as well and may be one of the reasons to consider dividend mutual funds. Returns should always conform to the expense ratio and the risk you’re willing to take.

Risk

Usually, the higher the returns, the higher your risk. More volatile funds can bring you higher dividends and can involve more risk.

Minimum Investment

Every dividend mutual fund might have a minimum investment requirement. Find out beforehand how much a broker charges for your minimum investment.

Ratings

The stocks in each dividend mutual fund have ratings. Usually, the higher the rating, the higher the reliability of the stocks in the dividend mutual fund.

Our Top Picks for the Best Dividend Mutual Funds

We picked the best dividend mutual funds based on the criteria above.

Fidelity Equity Dividend Income Fund (FEQTX)

hypothetical growth of 10,000 in a mutual fund

https://fundresearch.fidelity.com/mutual-funds/summary/316145101

Fidelity has been long-revered as a high-end provider of dividend mutual funds. The Fidelity equity dividend income fund is a solid choice and consists of both large-cap and mid-cap stocks. About 9/10 of the fund relies on U.S. stocks and the rest are foreign stocks.

Details about the fund:

  • Average returns since inception: 9.53% per year
  • Expense ratio: 0.71%
  • Minimum investment: None
  • Risk potential: 6 out of 10
  • Total net assets: $4.5 billion
  • No minimum investment requirement

The fund performs slightly lower than the benchmark indices. The fund might be a bit volatile, as its mid-cap stocks bring an aggressive touch.

Vanguard Dividend Appreciation Index Fund Admiral Shares (VDADX)

Average annual returns on a mutual fund
https://investor.vanguard.com/mutual-funds/profile/VDADX

The Vanguard dividend appreciation index fund admiral shares is a low-cost dividend mutual index fund. It’s another fund that involves high-quality companies that look for dividend growth over the years.

Details about the fund:

  • Average returns since inception: 8.04% per year
  • Expense ratio: 0.08%
  • Minimum investment: $3,000
  • Risk potential: 4 out of 5
  • Total net assets: $36.5 billion

VDADX offers a low expense ratio compared to the majority of the industry and could be one of the preferred choices as you look for dividend mutual funds.

The yearly dividend returns are nearly as much as the benchmark index. At the same time, the periods of the fund on the chart above show a high correlation with the benchmark index.

Vanguard Dividend Growth Fund (VDIGX)

Average performance of a mutual fund
https://investor.vanguard.com/mutual-funds/profile/overview/vdigx

VDIGX is another mutual fund that consists of dividend-based stocks. The fund contains high-quality companies from many industries. This fund is excellent for investors who want to pursue long-term returns.

Details about the fund:

  • Average returns since inception: 8.22% per year
  • Expense ratio: 0.26%
  • Minimum investment: $3,000
  • Risk potential: 4 out of 5
  • Total net assets: $30.9 billion

This dividend mutual fund performs better than the benchmark index, which maintains an average performance of 7.33% per year since inception.

Vanguard High Dividend Yield Index Fund Investor Shares (VHDYX)

Average performance of a mutual fund
https://investor.vanguard.com/mutual-funds/profile/overview/vhdyx

VHDYX puts emphasis on companies with slower growth and higher yield. This fund is suitable for investors who want to pursue a long-term financial goal and are ready to handle a little bit more volatility.

Details about the fund:

  • Average returns since inception: 6.79% per year
  • Expense ratio: 0.15%
  • Minimum investment: $3,000
  • Risk potential: 4 out of 5
  • Total net assets: $29.1 billion

The fund requires no purchase fee and no redemption fee.

The fund performs slightly lower than the benchmark index, which has a yearly return of 6.99% per year, though it performs almost the same as the benchmark index in each of the periods on the graph above.

Fidelity Strategic Dividend & Income Fund (FSDIX)

hypothetical growth of a mutual fund
https://investor.vanguard.com/mutual-funds/profile/overview/vhdyx

The Fidelity Strategic Dividend & Income Fund is another good investment choice. Around 66% of the fund consists of large-cap U.S. stocks and the rest is foreign stocks or bonds and other financial securities.

Details about the fund:

  • Average returns since inception: 6.84% per year
  • Expense ratio: 0.76%
  • Minimum investment: None
  • Risk potential: 5 out of 10
  • Total net assets: $4.2 billion

The average returns of this fund are lower than the funds previously mentioned. At the same time, the expense ratio is still as high, at 0.76%, which is the highest among the five choices we suggested. This fund offers the least amount of risk compared to the others we’ve listed.

The fund performs at an average level compared to the benchmark indices. There is a high correlation between the benchmark and the FSDIX fund, which means the asset is as reliable as the whole industry.

Final Thoughts

We’ve listed some of the best Vanguard mutual funds. Their major advantage is the extremely low expense ratio, distinctive of most of the Vanguard funds.

The Fidelity Equity Dividend Income Fund’s (FEQTX) expense ratio is higher than all Vanguard alternatives but it also has the highest dividend earnings. At the same time, the risk is nearly average for the industry. The lowest amount of risk comes from the Fidelity Strategic Dividend & Income Fund (FSDIX) if you want to lower your risk as much as possible.

In general, all five funds are among the top dividend mutual funds in the industry. They’re extremely diversified and are relatively correlated to the overall industries. This means that your investment in one of these funds will be worthwhile as long as the general industry trends upward.

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