The best dividend investment funds

The appeal of the mutual funds with the best dividends is clear: They offer a significant dividend today and can grow in the future, allowing investors to win in both directions. Plus, they offer other benefits, including lower risk through diversification. The investment funds with the best dividends are therefore an attractive prospect for any investor, but especially for retirees, who need current income today, but also growth for tomorrow, so that they do not outlive their assets.

Here you will find the best dividend investment funds and what you should pay attention to when investing. (Here are the best dividend ETFs, if you’re looking for that kind of fund.)

5 things to look out for in a dividend investment fund

It’s important to look at a number of factors when selecting a dividend investment fund, and while the size of the dividend is important, it’s not the only criterion you should use.

1. Dividend yield: While it may be tempting to screen the universe of mutual funds for the highest returns and then pick only those, you’ll likely run into trouble if you choose this route. The highest returns are likely to evaporate, often because the fund’s investment strategy will not be favorable over an extended period of time. A high return can then be a bad sign.
2. Dividend growth rate: The fund’s dividend growth rate is closely related to its yield and shows you how quickly the payout has grown over time. In general, the higher the better. But there’s usually a trade-off between the size of the dividend and how fast it grows. This means that a fund with a lower interest rate often grows its dividend faster than a fund with a higher interest rate.
3. Long-term returns: The long-term return of a fund – figures over five and ten years – is the best indicator of the sustainability of its strategy. Look for an average annual return that far exceeds the dividend yield. Otherwise, you’re sacrificing a lot of potential growth for revenue today. Or worse, your investment loses money so you can collect the dividend.
4. Cost ratio: The fund’s expense ratio is the amount you pay annually to own it, as a percentage of your total investment. You’ll pay this fee whether you make money in the fund or not, which is why it’s better to minimize it, especially since you can find attractive dividend mutual funds without paying a high expense ratio. An expense ratio of more than 0.5 percent – ​​a cost of $50 per $10,000 invested – is the pivot point of being reasonably priced.
5. Possess: Look at the fund’s holdings to see what kind of stocks it holds: high-quality blue chip stocks or unknown companies in a sector with suspiciously high returns? While diversification can protect you from company-specific risks, it won’t protect you if the fund only owns stocks from a questionable industry sector.

These factors can help you stay away from dividend funds that currently have unsustainably high returns and don’t have a solid long-term track record. Then you let your dividends roll in and use them to fund your lifestyle – a great passive investment – ​​or reinvest them for more profit.

Investment funds with top dividends

• Vanguard Dividend Appreciation Index Admiral Shares (VDADX)
• T. Rowe Price Dividend Growth Fund (PRDGX)
• Vanguard Dividend Growth Investor Stocks (VDIGX)
• Vanguard High Dividend Yield Index Admiral Shares (VHYAX)
• Vanguard Equity-Income Investor Shares (VEIPX)

Below are some of the highest dividend mutual funds with attractive long-term returns, growing payouts, reasonable fees and no sales charge. (Data from Morningstar as of December 8, 2023.)

Vanguard Dividend Appreciation Index Admiral Shares (VDADX)

This index fund tracks the S&P US Dividend Growers Index, a collection of primarily large-cap growth stocks and value stocks that have the ability to increase their dividends over time.

• Dividend yield: 1.9%
• 5 year return: 12%
• Cost ratio: 0.08%

T. Rowe Price Dividend Growth Fund (PRDGX)

This actively managed fund looks for companies with sustainable above-trend revenue and earnings growth that will allow them to increase their dividends in the future. The fund’s investments are mainly in large-cap and mid-cap stocks.

• Dividend yield: 1.2%
• 5 year return: 121%
• Cost ratio: 0.64%

Vanguard Dividend Growth Investor Stocks (VDIGX)

This fund invests in high-quality companies that can deliver strong total returns over time due to strong earnings growth and their ability to grow their dividends. Positions generally include large-cap stocks, and the fund aims to be diversified across sectors.

• Dividend yield: 1.7%
• 5 year return: 11.8%
• Cost ratio: 0.3%

Vanguard High Dividend Yield Index Admiral Shares (VHYAX)

This passively managed fund tracks the FTSE High Dividend Y–ield Index, which includes companies that pay above-average dividends. The fund invests primarily in large capitalization value stocks.

• Dividend yield: 3.1%
• 3 year return: 8.7%
• Cost ratio: 0.08%

Vanguard Equity-Income Investor Shares (VEIPX)

This actively managed fund invests in undervalued stocks that pay above-average dividends, and its holdings include mid-cap and large-cap value stocks. This fund is also available with a lower expense ratio (but a much higher minimum investment) in the Admiral Shares class under the symbol VEIRX.

• Dividend yield: 2.7%
• 5 year return: 9.6%
• Cost ratio: 0.28%

In short

Dividends are an important source of investor returns over time, and when combined with a rising fund price, you have a powerful 1-2 combination that can build wealth for decades with lower risk.

Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making any investment decision. In addition, investors are advised that the past performance of investment products does not guarantee future price increases.