[Updated on October 3, 2017 by David Dierking] Investing in long-term dividend growers has been a popular strategy for mutual fund investors looking to generate income from their portfolios. It’s easy to see why.
Studies have consistently shown that dividend-paying stocks tend to outperform their non-dividend paying counterparts over time. From 1930 to 2015, roughly 43% of the S&P 500’s total return came from dividends.
Companies with long histories of paying and growing their dividends demonstrate a financial strength and consistency that makes them ideal investments for most portfolios. Investors who choose funds that target these dividend growth stocks can generate strong risk-adjusted returns over the long term.
If you’re an investor looking to generate income or take advantage of a strategy with a long-term track record of success, consider adding one of these funds to your portfolio. In case you are wondering whether mutual funds are right for you, you should read why mutual funds, in general, should be part of your portfolio.
1. T. Rowe Price Dividend Growth Fund (PRDGX)
PRDGX is a 25-year-old fund that targets companies which have a strong track record of paying dividends and are expected to continue increasing their dividends over time. The fund sports a current dividend yield of 1.44% and counts JP Morgan Chase, Visa and Microsoft among its top 10 holdings. The fund’s expense ratio of 0.64% rates as below average for its category, while its 10% average annual return over the past three years tops the S&P 500.
See where mutual fund expenses are headed.
2. Vanguard Dividend Appreciation Index Fund (VDADX)
VDADX tracks an index comprised of a select group of stocks with at least 10 consecutive years of raising their annual dividend payments, commonly known as dividend achievers. Approximately 180 names fit the criteria including Johnson & Johnson, PepsiCo and United Technologies. The fund is up around 13% year-to-date and has an average annual return of 8% over the past three years. An expense ratio of just 0.08% makes this fund an industry-wide low-cost leader. The fund’s current dividend yield is 2.05%.
3. Invesco Diversified Dividend Fund (LCEIX)
LCEIX targets companies that have delivered above-average dividend growth rates. Since 2002, the fund’s annualized dividend growth rate was more than 12% versus 8% for the S&P 500. While the fund focuses on strong dividend growers, its primary goal is high total return. The fund has struggled thus far in 2017 returning just 4.5%, but it has managed an 8% average annual return over the past three years. It yields 1.63%, while the net expense ratio of 0.78% is less than average. Some of the fund’s top choices include Coca-Cola, General Mills and AT&T.
Check out the long-term performance of dividend-paying stocks here.
4. Franklin Rising Dividends Fund (FRDAX)
FRDAX takes a multi-pronged approach to selecting securities for the fund. It starts by looking for companies that have increased their dividend in at least 8 of the past 10 years and have at least doubled their dividend during that time. From that group, the fund’s managers layer on additional screens looking for balance sheet strength and low levels of debt. The fund, which charges 0.66% annually, is up almost 8% annually over the past three years and more than 11% year-to-date. Top holdings include Roper Technologies, Stryker Corporation and Honeywell International. The fund currently sports a 1.66% dividend yield.
Be sure to check how dividend payout growing firms performed over the long run here.
5. Fidelity Dividend Growth Fund (FDGFX)
FDGFX looks to deliver both capital appreciation and dividend income by investing in mega-cap stocks. The fund’s managers look at a company’s capital allocation policies, profitability and other metrics to determine if the dividend is sustainable and poised to continue growing. Names such as Apple, Johnson & Johnson, and ExxonMobil fill up this portfolio, which has returned 6.5% annually over the past three years. Its expense ratio of 0.62% is reasonable, while its dividend yield of 1.45% is in line with many of the funds on this list.
The Bottom Line
Long-term dividend growers often don’t pay the highest dividend yields, but shareholders have historically been rewarded with strong total returns. Companies that have continually grown their dividend tend to generate strong cash flows and are generally in a healthy financial position. These types of high quality businesses make great long-term investments.
Be sure to check out our News section to keep track of the recent fund performances.