Any serious investor should have a deep understanding of the importance of how dividends affect their portfolios over the long term.
Dividends, especially growing dividends, are a prime trait of companies that stand the test of time and have rising cash flows in any kind of economy. Dividends, when reinvested, can also have a powerful effect on the compounding of a portfolio’s returns over time. Take the S&P 500, for example. If you $10,000 invested in the S&P 500 in 1960 without dividends, it would be worth over $460,000 at the end of 2017. If dividends were reinvested during that same time, the initial $10,000 investment would be worth over $2.57 million.
Below is a list of the top 10 dividend funds any investor should own. The list is diverse in the fact that it ranges from funds that have performed well in the short term and long term. It also highlights other funds that are outside the normal large-cap U.S.-based funds.
Here is the list of the top 10 dividend funds based on different criteria.
1. Best Year-to-Date Performer: Meridian Equity Income A (MRAEX)
With a whopping year-to-date return of 17.0%, the Meridian Equity Income A fund (MRAEX) makes the list. The fund has seen this success on a year-to-date basis with over 8% in stocks like California Resources Corp (NYSE:CRC), which is up over 87% year-to-date. With an objective to invest in companies that have the ability to grow dividends, the fund has a 3-year average return of 15.96%. The fund currently yields 0.98% and has an expense ratio of 1.69%.
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2. Best Three-Year Performer: Leland Thomson Reuters Vntr Cptl Idx A (LDVAX)
The Leland Thomson Reuters Venture Capital Index A fund (LDVAX) is certainly not a typical dividend stock fund. However, with its current dividend stock holdings like Accenture PLC (NYSE:ACN) and Microsoft Corp (NASDAQ:MSFT), the fund is yielding 1.88%. The fund has the best three-year average return of 27.41% and is number one in the three-year large growth category according to Morningstar. The fund currently has an expense ratio of 1.99% and is designed to track the performance of U.S. venture capital-backed companies.
3. Best 10-Year Performer: AIG Focused Dividend Strategy A (FDSAX)
With a 10-year annual average return of 12.66%, the AIG Focused Dividend Strategy A fund (FDSAX) has been one of the best performing stocks in the last decade. The fund only consists of 30 holdings, which are selected using a quantitative rules-based pricing strategy. Each of the 30 holdings also have historically paid above-average dividends, which is why the fund is currently yielding 2.25%. With an expense ratio of 1.04% and a three-year track record of 9.99%, FDSAX is a good opportunity for investors looking for a high-conviction dividend fund.
4. Lowest Expense Ratio: Vanguard Dividend Appreciation Index Inv (VDAIX)
The most inexpensive mutual fund on the list is the Vanguard Dividend Appreciation Index Investor Shares fund (VDAIX), coming in at an annual expense of only 0.15%. The fund tracks a benchmark that provides exposure to U.S. companies that have a history of increasing their dividends. The fund has performed very well in the last three years and is up 11.2%, while still kicking off a 1.94% yield. Investors looking for a low-cost alternative that still performs well should look to this very popular Vanguard fund.
To learn more about other funds by Vanguard, check out the fund company page here.
5. Best Dividend Growth Fund: T. Rowe Price Dividend Growth (PRDGX)
A great sign of the strength of a company is its ability to not only pay a dividend, but also grow the dividend year after year. The T. Rowe Price Dividend Growth fund (PRDGX) looks for companies that have this quality, like Becton Dickinson and Co (NYSE:BDX), which has a 46-year track record of dividend hikes. The fund has averaged 12.37% over the last three years, has a current yield of 1.27% and an expense ratio of 0.64%.
To learn more about other funds by T. Rowe Price, check out the fund company page here.
6. Best High Yield Dividend Fund: PIMCO RAE Fundamental PLUS A (PIXAX)
The PIMCORAE Fundamental PLUS A fund (PIXAX) makes the list for its current 5.22% yield, which makes it one of the highest dividend funds out there. PIMCO, which is typically synonymous for its fixed income offerings, has seen success with this five star Morningstar fund. The fund is up 10.42% for the trailing three years and has an expense ratio of 1.25%. PIMCO uses the Research Affiliates Equity (RAE) fundamental investment strategy to pick this fund’s holdings, which are currently dividend-paying stocks.
7. Best Balanced Dividend Fund: Dodge & Cox Balanced Fund (DODBX)
Probably the most recognizable mutual fund on the list is the Dodge & Cox Balanced Fund (DODBX), which has been around since 1931. The fund is a low-cost balanced fund, with a 0.53% expense ratio, that currently has an asset allocation of 66% stocks and 33% bonds. The fund has several objectives, with the most important being regular income and conservation of principal. That being said, the fund currently yields 2.12% and has an average annual three-year return of 8.98%. Investors looking for a tried and true mutual fund to invest over the long haul should look to the Dodge & Cox Balanced Fund.
8. Best International Dividend Fund: William Blair International Ldrs Instl (WILJX)
WIlliam Blair has always been a major player in the international asset management field and the International Leaders fund (WILJX) has been a major cause of that. The fund focuses on 40 to 70 stocks that are of high quality and have sustainable growth characteristics. The fund has been successful over the last three years, with an average return of 9.54% while still yielding 1.48%. For investors looking for international exposure but still crave a dividend, look to this fund, which has a moderate expense ratio of 1.03%.
9. Best Global Dividend Fund: Kopernik Global All-Cap A (KGGAX)
Dividends are not solely a characteristic of U.S. stocks but also stocks around the world. The Kopernik Global All-Cap A fund (KGGAX) is a prime example of a fund that can invest in any part of the world. The firm utilizes bottom-up fundamental analysis to gain a thorough understanding of a company’s business and valuation. For the trailing three-years, the fund has a return of 13.50% but what makes the fund really attractive is the high yield of 13.50%, for a nominal expense of 1.30% annually.
10. Best Mid/Small Cap Dividend Fund: Great-West Mid Cap Value Instl (MXKJX)
When it comes to investing, it always makes sense to diversify across many different asset classes. However, when investing in small and mid cap companies, most of these companies typically have little to no dividend. The Great-West Mid Cap Value Institutional fund (MXKJX) primarily invests in mid and small cap stocks yet the fund produces a 2.10% yield. From a return perspective, the fund has performed well, with a three-year average return of 7.53%. Investors looking to diversify their portfolios without having to give up dividends should look at this fund that only costs 0.84%.
The Bottom Line
The list provides a variety of dividend-paying mutual funds that any investor should consider as part of their portfolio. Dividends are a great way to build wealth over the long run, by providing income to retirees or through compounded growth when reinvested.
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