Ellen Chang
Mutual funds with dividends can be a smart investment.
Dividends provide steady income for investors who want to lower their risk. Several investments pay dividends, including mutual funds, stocks, exchange-traded funds and dividend reinvestment plans, known as DRIPs. High-dividend funds are attractive to investors who want a guarantee on the cash flow they receive from their investments and to avoid large swings in the stock market. "Often people in retirement like high-dividend funds because there is some degree of predictability about the cash that one will receive every year to supplement social security," says Derek Horstmeyer, an assistant finance professor at George Mason University. For income-seeking investors, here are seven Vanguard mutual funds that provide higher dividend yields.
Vanguard High Dividend Yield Index Fund Admiral Shares (ticker: VHYAX)
The Vanguard High Dividend Yield Index Fund Admiral Shares Index tracks a benchmark that includes U.S. large-cap companies that consistently pay larger-than-average dividends. In a low interest rate environment, fixed income does not always deliver the yield investors are looking for, says Rich Messina, senior vice president of investment product management at E-Trade Financial. "A high-dividend mutual fund can help fill that void in a portfolio because it typically offers a steady return," he says. One example is this Vanguard fund that has a relatively low expense ratio of 0.08%, with a minimum investment of $3,000.
Yield: 3.2%
Vanguard Dividend Growth (VDIGX)
The Vanguard Dividend Growth fund consists of large-cap stocks including both value and growth stocks. The expense ratio is 0.22% since this is an actively managed fund by Wellington Management Co., with a minimum investment of $3,000. One of the fund's attributes is that it is managed by Donald Kilbride, an active portfolio manager who has a well-reasoned investment philosophy that he executes consistently, says Thomas Hoffman, a partner at Netherby Advisors. Kilbride's philosophy is to own only companies that he expects will be increasing dividends in the future. "It is not so much about high dividends as rising dividends," he says. The three-year return is 15.7% while the 10-year return is 13.3%.
Yield: 1.8%
Vanguard Equity Income Fund Investor Shares (VEIPX)
Vanguard Equity Income Fund Investor Shares is a large-cap value fund. Value stocks tend to have a lower price-earnings ratio relative to earnings and are priced lower. The investment manager is targeting higher than normal dividend returns in these types of funds, says Daren Blonski, managing principal of Sonoma Wealth Advisors. "It is important to understand why the underlying companies in these mutual funds are paying higher than normal dividends and what risk as an investor you're taking on as a result," he says. The fund is actively managed by Wellington Management and Vanguard Quantitative Equity Group and has an expense ratio of 0.27%. The three-year return is 12.2% and the 10-year return 13.1%.
Yield: 2.7%
Vanguard International High Dividend Yield Index Fund Admiral Shares (VIHAX)
A value fund that focuses on foreign large-cap stocks is the Vanguard International High Dividend Yield Index Fund Admiral Shares. The fund is managed by the Vanguard Equity Index Group and holds nearly 1,000 stocks, which can decrease volatility. The expense ratio is 0.32%. This fund was founded in March 2016 and has a 7.1% three-year return and an 8.3% one-year return. High-dividend mutual funds can be an attractive addition to a portfolio because they can offer additional dividends and increase overall performance regardless of overall market returns, Blonski says. "As we appear to be in another interest rate decrease cycle, yields on bonds will become more challenging," he says. "Investors will be looking for options to generate yield in their portfolio and high dividend-paying mutual funds could help bridge a yield gap."
Yield: 2.7%
Vanguard Dividend Appreciation Index Fund (VDADX)
The Vanguard Dividend Appreciation Index Fund consists of stocks based on a benchmark index and includes companies have been raising their dividends, Hoffman says. The fund owns more than 180 stocks and has a low expense ratio of 0.08%. The performance of the fund and ETF version, Vanguard Dividend Appreciation ETF (VIG), is attractive, he says. The three-year return is 15.5% while the five-year return is 10.9%. While the yield is 1.7%, the companies included in the index have a history of increasing dividends. The income from the dividends can add up over a longer period of time.
Yield: 1.7%
Vanguard Utilities Index Fund Admiral Shares (VUIAX)
The Vanguard Utilities Index Fund Admiral Shares focuses on stocks in the utility sector that provide reliable and regular dividends. This fund includes nearly 70 companies that produce water, electricity, gas or power, which consumers and businesses depend on despite the outcome of the economy or stock market. While the expense ratio is low at 0.1%, the minimum investment is high at $100,000. Investors can opt instead for the ETF version, Vanguard Utilities ETF (VPU), in which the minimum only requires that one share -- around $136 -- is purchased. Another benefit of high-dividend mutual funds is that they have a lower duration, which means that the value of high dividend stocks is less sensitive to interest rate changes, Horstmeyer says. "This means there is lower volatility in the value of the mutual fund as interest rates move around," he says. "High-dividend stocks slightly insulate one from the Fed's decisions."
Yield: 2.9%
Vanguard Real Estate Index Fund Admiral Shares (VGSLX)
The Vanguard Real Estate Index Fund Admiral Shares invests in real estate investment trusts which are companies that buy hotels, office buildings and other real estate assets. This fund owns more than 180 stocks of real estate investment trusts in the following sectors: health care, hotel, industrial, office, residential, retail and specialized industries. "A broadly diversified fund minimizes individual stock risk, which can be an issue if your portfolio is too concentrated," Blonski says. "Mutual funds and ETFs help the individual investor spread their risk across multiple investments and mitigate some of their risks through diversification. "The three-year return is 9.5% while the 10-year return is 13.5%. The expense ratio is 0.12% with a minimum investment of $3,000.
Yield: 3.3%
Best Vanguard funds for dividends.
-- Vanguard High Dividend Yield Index Fund Admiral Shares (VHYAX)
-- Vanguard Dividend Growth (VDIGX)
-- Vanguard Equity Income Fund Investor Shares (VEIPX)
-- Vanguard International High Dividend Yield Index Fund Admiral Shares (VIHAX)
-- Vanguard Dividend Appreciation Index Fund (VDADX)
-- Vanguard Utilities Index Fund Admiral Shares (VUIAX)
-- Vanguard Real Estate Index Fund Admiral Shares (VGSLX)
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