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You should consider high dividend mutual funds as part of a health, matured portfolio. The main reason people choose to invest in this type of fund is to secure passive income. For the most part, the fund managers pick stable stocks that have an above industry average dividend that gets paid to the stakeholders quarterly.
This type of investment generally is relatively low risk as the stocks that get picked are usually stable, mature, and have a historically good track record. The key is to have a share price that doesn’t move much in either direction and have a traditionally high dividend payout.
For the most part, high dividend mutual funds are perfect for individuals that do not want to actively manage their portfolio and are interested in stability and income. The fund manager will pick stocks based on the dividend rate and the stability of the stocks share price.
Once a company is matured and has nowhere else to go, the stock price generally works itself out to be absolutely accurate. Of course, there will be fluctuations based on earnings reports and such, but these are usually temporary and small with the types of stock that are in high dividend mutual funds. In fact, the share price is more of a reflection of the economy than it is the individual company’s performance.
The perfect stock for this type of investment would be one that has a 5+% dividend and has a share price history that has remained within 10% of the average stock price over a one year period. With a portfolio full of these stocks, you should be pretty confident the value of the underlining assets will remain stagnant, and the dividend will remain in the same range over time.
Of course, if you are young and wish to grow your money for retirement, this is probably not the best investment for you. Many people invest a portion of their portfolio into growth stock mutual funds after they retire and want to hang onto to their principal, but add a little extra to their income.
There are many excellent high dividend mutual funds to choose from, you can get a feel for how sound the investment is by using the below criteria:
Age: How long has the fund been around?
Assets: How much money does the fund have under management? This is a great question to ask as it gives you a great feel for how institutional investors feel about the fund. In addition, the more assets the fund has the more options the fund manager has.
Rating: It probably goes without saying, but you should never purchase any mutual fund if you don’t know how it is rated and reviewed.
Fund Managers: Look at the track record of the fund manager and see if he/she has a history of sticking to the funds stated mandate. Many fund managers tend to go off on their own if they see an opportunity. This is fine for certain types of funds, but not for the high dividend mutual funds.
Performance: You should give them a little bit of slack during a bad economy. However, you can still benchmark each fund against other funds with the same mandate.
Fees: Finally, the fees are the biggest obstacle to mutual funds of any kind. Make sure you completely understand the fees involved with the fund and be sure they are on par with other similar rated funds in the industry. Do not pay additional fees; instead go with a competing fund.
To summarize, high dividend mutual funds are excellent investments and should be a portion of any matured portfolio. Be sure to do your research upfront and I’m sure you will pick the best fund for you and your unique situation.
