Yield to Yield
Some dividend funds offer more, or less, than investors bargain for.
Income-seeking investors have been in a tough spot lately. Bond, CD, and money market yields are paltry. Pitiful fixed-income yields might make stock dividend yields look attractive by comparison, but they come with extra company-specific and market risk. The 15% tax rate that most stock dividends have enjoyed for the past seven years could expire at the end of the 2010.
However, more companies seem well-situated to reinstate or increase their payouts after using the aftermath of the financial crisis to pay down debt, bolster balance sheets, and amass cash. Some high-quality companies, like Johnson & Johnson (JNJ), even offer dividend yields higher than the yields on their 10-year corporate bonds. This rare phenomenon makes dividend-paying stocks more appealing to income-seeking investors. So does market volatility, because dividend-paying companies tend to be defensive.
About 60 distinct funds in Morningstar's database use the word "dividend" in their names (many others pursue an equity-income objective), but it's a diverse bunch. Some are dividend funds in name only, while others are dividend zealots that won't own a stock without a payout. Some chase the fattest yields, while others care more about a company's ability to grow its dividend over time. And of course there are a whole bunch of funds in between. The bottom line is that dividend funds don't ensure safety and security, and some introduce even more risk in pursuit of yield.
Katie Rushkewicz Reichart has a position in the following securities mentioned above: VDIGX. Find out about Morningstar’s editorial policies.