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By Russel Kinnel and Christine Benz | 02-05-2015 11:00 AM

5 Fund Picks for Dividend Investors

Morningstar's Russ Kinnel shares his favorite funds for dividend growth and dividend yield.

Christine Benz: Hi, I'm Christine Benz for Morningstar.com. Ever since the financial crisis, investors have been in love with dividends. Joining me to discuss some of his favorite dividend-focused funds is Russ Kinnel. He is director of manager research for Morningstar.

Russ, thank you so much of being here.

Russ Kinnel: Good to be here.

Benz: Russ, before we get into these specific fund picks, let's talk about the general case for dividend payers--why you might want to make room for them in your portfolio.

Kinnel: I think dividend-paying stocks offer a couple of advantages, the obvious one being income in a world where there isn't much income to be had. But also, there are some nice defensive characteristics. They tend to be kind of dull stocks that are just steady--obviously, things like utilities and others. And generally--not always, but generally--higher-yielding stocks tend to hold up well in a down market.

In the 2000-02 bear market, we saw them hold up beautifully. In the 2008-09 bear market, it was a much more mixed picture because some of those yield payers were financials, which obviously got hit very hard in that market.

Benz: Right. Let's discuss the role of costs in any sort of dividend-focused fund that you might buy. How are the two interconnected? Because I noticed that all of the fund picks that you're going to recommend really do have quite low costs relative to their peer groups.

Kinnel: A fund pays out income after expenses. So, those expenses actually come from its yield, if it has sufficient yield to cover expenses. Comparing two similar portfolios--one has a 1% expense ratio, the other has a 10-basis-point expense ratio--the cheaper one is going to have a yield of 90 basis points more. So, there is a very direct link there.

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