Four Great Dividend Funds

Back in January I wrote about a watch list of funds to consider if the proposed dividend-tax cut was passed. Now that a cut has been passed, I'll revisit the list.

The new cut places the same tax rate on dividends as on long-term capital gains. For a taxable account this means you'd probably have a slight bias towards capital gains over dividends. The reason is that your capital gains can accumulate and compound over the years so that you'd enjoy a greater return in the end.

That said, the playing field is close enough now that it's not a bad idea to have a decent value component in your taxable accounts. Most tax-sheltered accounts are designed to be withdrawn during retirement, but you don't have that restriction in a taxable account. You might want to cash out some of your taxable funds before you retire and you'll make the ride a little smoother by having both growth and value in your portfolio.

With that in mind, here are four good dividend-focused funds to consider. The standard list of things to look for in a good fund apply: strong management, low costs, a sound strategy, and a proven track record. I’d steer clear of utilities funds because their focus is too narrow and most of them cost too much.

 American Funds Washington Mutual  (AWSHX)
This fund requires that its holdings have paid dividends in nine of the past 10 years, so it throws off a sizable yield. More importantly, the fund's managers have shown they can do outstanding fundamental research. They don’t take on much price risk--or much of any risk for that matter--yet they’ve produced great long-term returns. Most of the portfolio’s income will flow through to you because its A shares charge just 0.65% a year.

 T. Rowe Price Equity-Income (PRFDX)
This fund is cut from the same cloth as Washington Mutual. As stock funds go, this one is pretty low-risk. Manager Brian Rogers maintains a well diversified portfolio with very low weightings in top stocks so that no single stock or sector can sink the fund. Over the years, it has proven to be much less volatile than most stock funds, and it held up nicely during the bear market.

 Dodge & Cox Stock DODGX
Once again I’ve chosen a conservative fund with long-tenured management. It follows a straightforward buy-and-hold value approach. Although you can find the approach elsewhere, there aren’t many that have executed it as well. Credit goes to skilled management and Dodge & Cox’s long-term focus. Oh, and this one has low costs, too.

 Vanguard Equity Income  (VEIPX)
With an expense ratio of just 0.46%, this fund is a little cheaper than the others. In addition, it’s the only one of the four to have multiple subadvisors. Dodge & Cox and Washington Mutual have multiple managers, but they’re all from the same firm. At this fund, Vanguard doles out assets to Wellington Management, Newell Associates, and Levin & Co. Levin was brought on board in 1998. Those differences aside, this is another quiet, diversified choice, that offers attractive returns and yield.

A version of this article appeared January 16, 2003.