Why Invest in High Dividend Mutual Funds

If you want to invest in the stock market, and are looking for a regular income in the form of dividends, you would want to know how to select stocks that pay high dividend regularly. You may need to research stock market trends, identify stocks with good consistent dividend from news reports, or take advice from a stock market expert. Does the whole exercise seem too cumbersome and fraught with risk for you? Do you sometimes get confused about which stocks you should choose? Have you been given advice that too much dividend from a company is also a sign of trouble?


Investing in mutual funds that make all the investment choices for you is an ideal option for the inexperienced and uninitiated investor. Mutual funds can choose the stocks, which return consistent dividends for you and place them in the mutual fund portfolio. Correspondingly, high dividend mutual funds, which invest in such stocks, would also make consistent and attractive dividend payments.

This is a time when the yield from bond investments is low. According to a Bank of America report, many companies in the Standard & Poor's (S&P) 500 Index are offering more money in dividends than you would get if you had bought a bond. The Standard & Poor Dividend Aristocrat Index 2010, tracks large cap stocks paying increasing and consistent dividends over the last 25 years. You can get an idea of who are the high-dividend paying companies from this list, which keeps changing from time to time.

What are the Advantages of High Quality Dividend Mutual Funds?

You may wonder why bother with a mutual fund? Why not just look at the Standard and Poor (S&P) Dividend Aristocrat Index and buy shares in those stocks. But it's not so simple. The S&P Dividend Aristocrat Index keeps changing from time to time, as companies fail to meet standards. The list of companies comprising this high dividend index is reviewed every December. For the coming year, S&P has announced the addition of two new company stocks Brown Foreman and Cintas. However ten companies have been taken off this index. The companies removed from the Dividends Aristocrats Index include General Electric (GE), Pfizer and Johnson Controls. If you invested in stocks directly, you would have to keep track of all the developments in the stock market from news reports and index statistics.

Quality dividend mutual funds lighten your burden by doing a lot of homework for you, so that you can get the best returns.

Let us look at some of the advantages of high quality dividend mutual funds:

• Portfolio selection and management - Every mutual fund has a professional fund manager. The fund manager selects the choice of high yield stocks that would give good dividends. The fund manager also keeps a watch on stock market trends and optimises the fund investment portfolio.
• Diversified investment in high yield stocks - It is an age-old adage that one should never put all eggs in one basket. Similarly financial experts advise that one should diversify investments by buying shares in various stocks. Quality high dividend mutual funds invest in a variety of sectors and stocks, all of which contribute to fulfilling your investment objective of high, good quality dividends.
• Reduced risk from stock market exposure - High quality dividend mutual funds give you the best of worlds. You are relatively protected from the volatility of the stock market, while at the time getting good dividends on your mutual fund investments due to high yield stocks in the fund portfolio. The risks of stock market exposure to an uninitiated and small time exposure are less in a mutual fund.

Will I get Good Dividends in Large Cap Mutual Funds?

Large cap companies, also called blue chip companies, are said to epitomise stability and show consistent profits and returns over a number of years. All the stock market indices are calculated using the performance of large cap companies stock. For example, the Bombay Stock Exchange (BSE) Sensex uses thirty large cap or blue chip companies from various sectors to calculate the index. The S&P 100 uses the top 100 large cap companies in the United States (US).

Large cap mutual funds only include stocks from blue chip companies in their fund portfolio. While the dividend returns may not be highest from investment in large cap mutual funds, they may be more stable due to the consistent performance of the large cap companies over a number of years. Investment in such funds may also be safe during a market downturn as blue chip companies have strong fundamentals and are able to weather market trends and downturns.

Index funds are a type of large cap mutual funds that only invest in all the companies included in indices. Since indices factor in large cap companies, an investment in index funds may assure you of stable and good dividends.

There are of course exceptions to any rule. In recent times, we have seen huge financial institutions such as Lehmann Brothers collapsing, which was followed a stock market downturn, especially in banking stocks. In such cases, expectations from high dividend mutual funds would have to have been lowered.

How to Find the Best Mutual Fund for Me?

A best mutual fund would be one that fits perfectly with an individual's investment objectives and gives the highest performance for that objective. There are a number of reports in the media and from reputed financial institutions, which release a listing of high quality dividend mutual funds. The best mutual fund for stable and high dividends can be selected from these reports. For example, Standard & Poor maintains a rating and analysis of over 20,000 mutual funds. Lipper, a Thomson Reuters company, also rates fund according to returns and capital appreciation, which can be used to find out which are high quality dividend mutual funds.

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