There was a time when dividend-paying stocks went out of fashion. The hottest companies, it was argued, were rising so fast in price that they didn’t need to pay them. Dividends were for stodgy old established companies.
That time was the tech stock bubble, and we all know how it ended.
Times have changed. Apple pays a .73% per share dividend. Microsoft pays a .43% per share dividend. Amazon doesn’t pay a dividend, but it’s feeling the pressure to fork over. Dividend-paying companies are, by definition, companies that are making a profit, have piled up a lot of cash, and are sharing it with their investors.
For those investors, dividends are an income stream or, even better, a reinvestment that turbo-charges a portfolio’s returns over the long term.
The Best Dividend Funds
For investors who don’t like to fly solo, dividend funds offer a way to invest in dividend-paying stocks in companies that have the potential for long-term growth.
How do you pick the best from the rest? Look at the fund’s performance, long-term and recent. Check how that performance stacks up against its benchmark, and against wider market indexes. Look at the fund’s costs to make sure your profit isn’t getting nibbled away.
Below are four funds that focus on investing in solid companies that yield good dividends. All of them show excellent average annual returns over a 10-year period. All have low costs. All performed well compared to their benchmarks.
And all of them look plug-ugly for the 12-month period ending Feb. 27, 2019, the time period used below for year-over-year performance comparison.
During the same 12-month period, the S&P 500 Index was down 4.38%. The Dow Jones Industrial Index was up 5.27%. Long-term investing is not for the faint of heart.
Vanguard Dividend Appreciation ETF (VIG)
Many investors like exchange-traded funds (ETFs) because they offer exposure to a wide range of securities while keeping costs to a minimum. By definition, ETFs track a specific market index with the aim of matching its performance. They’re easy to follow since they’re traded like stocks. And, they have low costs because they are not actively managed.
The Vanguard Dividend Appreciation ETF uses the NASDAQ US Dividend Achievers Select as its benchmark. The holdings in this ETF are wide-ranging with the biggest concentrations in industrials, consumer goods, consumer services, and technology. Its biggest holdings are in Microsoft, Walmart, and Johnson & Johnson stocks.
VIG has an expense ratio of .08%.
Below are the index’s returns compared to its benchmark, as of Feb. 27, 2019. (Benchmark index returns are in italics.)
Vanguard Dividend Appreciation ETF (NASDAQ US Dividend Achievers Select)
- One-year: -2.02 (-1.98)
- 10-year: 11.70 (11.81)
Fidelity Equity Dividend Income Fund (FEQTX)
The Fidelity Equity Dividend Income Fund is an actively managed mutual fund that aims to exceed the yield of the S&P 500 Index. It uses the Russell 3000, a broad stock market index, as its benchmark.
FEQTX normally invests at least 80% of its assets in stocks that offer dividends and have the potential for long-term capital appreciation. About 85% of its holdings are in American stocks, led by Verizon, Wells Fargo, and Chevron.
FEQTX has an annual net expense ratio of 0.62%.
Below are the index’s returns compared to its benchmark, as of Feb. 27, 2019. (Benchmark index returns are in italics.)
Fidelity Equity Dividend Income Fund (Russell 3000)
- One year: -9.74% (-8.58%)
- 10-year: 10.25 (11.12%)
Vanguard Equity Income Fund Investor Shares (VEIPX)
The Vanguard Equity Income Fund invests primarily in undervalued mid- and large-cap stocks that pay above-average levels of dividend income compared to their competitors. It primarily invests in U.S. equity securities and allocates only 9.1% of its portfolio to foreign securities. The current mix is heavy on healthcare, financials, and consumer staples. Its biggest holdings are in the stocks of JP Morgan Chase, Johnson & Johnson, and Verizon.
VEIPX charges an annual net expense ratio of 0.27%.
Below are the index’s returns compared to its benchmark, as of Feb. 27, 2019. (Benchmark index returns are in italics.)
Vanguard Equity Income Fund (Spliced Equity Income Index)
- One year: -5.72 (-5.85%)
- 10-year: 12.17 (10.51%)
Fidelity Strategic Dividend & Income Fund (FSDIX)
The Fidelity Strategic Dividend & Income Fund is an actively managed fund that seeks solid dividend-paying companies but adds a dose of bonds to its mix. About 70% of its total assets are in common stocks but it allocates as much as 20% to corporate bonds. As of now, its biggest stock holdings are in the real estate, consumer, and healthcare sectors.
FSDIX charges an expense ratio of 0.71%.
Below are the index’s returns compared to its benchmark, as of Feb. 27, 2019. (Benchmark index returns are in italics.)
Fidelity Strategic Dividend & Income Fund (Fidelity Strategic Dividend & Income Composite Index)
- One year: -4.49% (-2.47%)
- 10-year: 11.88% (11.79%)
