Income-Focused Equity Funds That Actually Deliver
A short list of high-quality funds with market-beating dividend yields.
With yields on bonds and cash instruments as low as they are, many investors--especially retirees--have fallen in love with dividend-paying stocks. Their yields are, in some cases, higher than bonds, and the stocks have the potential to gain in value over the investor's holding period. (Of course, equities' share prices can also fall precipitously, which is the key reason investors shouldn't supplant their bond and cash holdings with equities.) Dividends also enjoy favorable tax treatment relative to income from bonds and cash. Finally, it's worth noting that dividends have historically contributed a huge share of the market's long-term return.
That said, equity funds that emphasize dividends don't always deliver rich payouts. Some focus on companies that not only pay dividends but that have the ability to increase them over time; that's the strategy in play at fine funds like
Other funds might set out to buy income-producing stocks, but their payouts are stymied by their expense ratios. That's because expenses are deducted from an investment's income first. So, if an income-focused fund has a high price tag, the problem will show up in its yield.
To help shine a light on good-quality income-focused equity funds that actually deliver a stream of dividend income above the S&P 500's, we screened our database for Morningstar Medalist funds with trailing 12-month dividend yields above 2%. After all, a plain-vanilla S&P 500 Index exchange-traded fund would have yielded 1.92% over the past year, so one would hope that a fund specifically targeting dividends would do even better on the income-production front. To help ensure apples-to-apples comparisons, we also screened out funds that steer significant shares of their portfolios--more than 10% of assets--into bonds and "other" asset types like convertibles and preferreds.
Here's a closer look at three funds that appeared on the list. Premium Members can click here to view the list or alter it to their specifications.
While
--notably real estate and utilities--this Silver-rated fund's focus on not overpaying for higher-yielding stocks should hold it in good stead in the years ahead. In fact, senior analyst Katie Rushkewicz Reichart notes that its stakes in utilities and real estate are ultralow relative to its large-value peers. Lead manager Ben Fischer is also among the longest-tenured managers running a dividend-focused fund, with an identical share class dating back to 1989, and he's backed by a deep team. Note that the fund may carry a sales charge for some investors, and that the yield on the A shares falls below our 2% threshold.
The sole Gold-rated fund on our list of dividend achievers, Washington Mutual is about as old school as it gets. It invests 95% of its assets in dividend-paying companies--ideally, those with long histories of paying dividends--and targets a higher dividend yield than the S&P 500. Among companies that clear its dividend hurdles, management looks for quality; thus, it's not surprising that 93% of the companies in the portfolio have either wide or narrow economic moats, according analyst Alec Lucas. The A shares carry a sales charge for some investors, but their expense ratio is a low 0.60%, which means that a high percentage of its dividends flow through to shareholders.
Three Vanguard funds made the cut for our screen, including the venerable