What are the disadvantages of a dividend mutual fund?
Mutual funds come with many advantages, such as advanced portfolio management, dividend reinvestment, risk reduction, convenience, and fair pricing. Disadvantages include high fees, tax inefficiency, poor trade execution, and the potential for management abuses.
Dividend-paying stocks have the potential for income through dividends and capital appreciation, but they come with higher volatility and market risk. The choice between the two depends on your risk tolerance, investment goals, and time horizon.
Lower risk: Dividend yield funds generally have lower risk than many other types of equity mutual funds, as they invest in companies that have a stable and consistent track record of paying dividends. These companies are usually well-established, mature, and have strong cash flows.
If your stock or balanced fund is paying out a dividend or capital gains distribution, or both, the net asset value (NAV) of the fund will drop by the per share amount of the distributions (most bond funds accrue interest so that dividend distributions do not reduce net asset value).
Because of their lower volatility, dividend stocks often appeal to investors looking for lower-risk investments, especially those in or nearing retirement. But dividend stocks can still be risky if you don't know what to avoid. Here's a closer look at how to invest in dividend stocks.
Dividend stocks are shares of a company that splits a portion of its profit with all its shareholders based on the number of shares each investor owns. Investing in companies with a strong track record of paying — and increasing — dividends can lead to stable cash flow even during recessions.
- Dividends are not guaranteed. A company may decide not to pay dividends any further. ...
- Another con of dividend investing for passive income is the eventual ceiling of returns. ...
- Although companies with a very high dividend yield may seem appealing, they are extremely likely to reduce their dividend.
Dividend yield mutual fund is a category of equity mutual fund which invests specifically in stocks of companies that pay high dividends to investors. They are relatively less risky than other categories of equity MFs and are suitable for investors with low risk appetite and for those who seek regular incomes.
Fund | Expense Ratio | 30-day SEC Yield |
---|---|---|
JPMorgan Equity Premium Income Fund (JEPAX) | 0.85% | 6% |
Fidelity Floating Rate High Income Fund (FFRHX) | 0.72% | 8.8% |
Baird Intermediate Bond Fund (BIMSX) | 0.55% | 4.2% |
PGIM High Yield Fund (PBHAX) | 0.75% | 7.2% |
Depending on how much money you have in those stocks or funds, their growth over time, and how much you reinvest your dividends, you could be generating enough money to live off of each year, without having any other retirement plan.
What happens when a mutual fund pays a dividend?
When a mutual fund pays a dividend, the value of each share is reduced proportionately. For example, if you were to begin with a net asset value of $20 per share and the mutual fund pays a dividend of $1 per share, the net asset value would be reduced to $19.
Dividend-paying mutual funds give investors a chance to put their money into an investment vehicle the tends to perform well. They tend to offer great returns and low volatility while allowing investors to diversify their holdings.
Mutual funds may also not be the best option for more sophisticated investors with solid financial knowledge and a substantial amount of capital to invest. In such cases, the portfolio may benefit from greater diversification, such as alternative investments or more active management.
Dividends can be classified either as ordinary or qualified. Whereas ordinary dividends are taxable as ordinary income, qualified dividends that meet certain requirements are taxed at lower capital gain rates.
Dividend Stock | Current Dividend Yield* | Analysts' Implied Upside* |
---|---|---|
JPMorgan Chase & Co. (ticker: JPM) | 2.3% | 2.8% |
Home Depot Inc. (HD) | 2.5% | 10.5% |
Procter & Gamble Co. (PG) | 2.4% | 15.4% |
Johnson & Johnson (JNJ) | 3.1% | 25.3% |
Equities and equity-based investments such as mutual funds, index funds and exchange-traded funds (ETFs) are risky, with prices that fluctuate on the open market each day.
Treasury Bonds
Investors often gravitate toward Treasurys as a safe haven during recessions, as these are considered risk-free instruments.
However, during a market crash, stock prices come down. This, in turn, pulls down the performance of mutual funds holding these stocks. Companies, too, face a tough time with their operations taking a hit, and it takes time for stocks to recover. Performance improves only when stocks recover lost ground.
Cash, large-cap stocks and gold can be good investments during a recession. Stocks that tend to fluctuate with the economy and cryptocurrencies can be unstable during a recession.
It's prudent to focus on long-run total return, rather than income only. Dividends -- either reinvested or taken in cash -- lead to a higher tax bill. Dividend-paying stocks carry unsystematic risk, which could otherwise be diversified away.
Is a dividend fund better than an index fund?
One big advantage of index funds when weighing dividend vs index investing is that they can help you avoid the risk of choosing a mutual fund with a management style that virtually guarantees below-average long-term performance.
Conversely, a drop in share price shows a higher dividend yield but may indicate the company is experiencing problems and lead to a lower total investment return.
To generate $5,000 per month in dividends, you would need a portfolio value of approximately $1 million invested in stocks with an average dividend yield of 5%. For example, Johnson & Johnson stock currently yields 2.7% annually. $1 million invested would generate about $27,000 per year or $2,250 per month.
Ticker | Name | 5-year return (%) |
---|---|---|
SSAQX | State Street US Core Equity Fund | 16.88% |
PBFDX | Payson Total Return | 16.73% |
FGRTX | Fidelity Mega Cap Stock | 16.52% |
STSEX | BlackRock Exchange BlackRock | 16.27% |
Fund Name | Category | Risk |
---|---|---|
HDFC Dividend Yield Fund | Equity | Very High |
Aditya Birla Sun Life Dividend Yield Fund | Equity | Very High |
Templeton India Equity Income Fund | Equity | Very High |
LIC MFDividend Yield Fund | Equity | Very High |