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All Contents © 2020The Kiplinger Washington Editors
By Kent Thune
| November 8, 2017
The best dividend funds for retirement will have a combination of high yields, low expenses and a solid performance history.
In other words, the search for the top dividend funds to buy in retirement isn't all about yield. For example, a high-yielding mutual fund which also has a high expense ratio and an inconsistent performance history may not be a "good" dividend fund when considering the whole picture.
So, when looking for dividend mutual funds for income in retirement, a broader view is necessary. Some of these factors include expenses, performance, diversification, tax efficiency and fund manager. After all, you don't want your yield to be overshadowed by poor total returns.
With these qualities in mind, we put together a list of seven of the best dividend mutual funds that should be on every retired investor's radar.
Prices and data are from the original InvestorPlace story published on Oct. 26. Click on ticker-symbol links in each slide for current prices and more.
The yield for some funds represents the SEC yield, which reflects the interest earned after deducting fund expenses for the most recent 30-day period. SEC yield is an accepted measure for bond funds and other income-oriented funds.
SEC Yield: 2.9%
Expenses: 0.15%, or $15 for every $10,000 invested
Minimum initial investment: $3,000
Investors looking for broad exposure to U.S. stocks that pay above-average yields are wise to consider Vanguard High Dividend Yield Index (VHDYX).
VHDYX passively tracks the FTSE High Dividend Yield Index, which consists of about 400 U.S. companies, such as Microsoft (MSFT), Johnson & Johnson (JNJ), and Exxon Mobil (XOM).
Not only do investors get a broad selection of U.S. stocks that pay dividends, the passive nature of this index fund means low turnover, which translates into greater tax-efficiency for investors holding VHDYX in a taxable account.
SEC Yield: 3.5%
Minimum initial investment: $2,500
Retired investors wanting exposure to high-yield bonds, growth stocks and dividend stocks should take a look at the highly rated Fidelity Capital & Income (FAGIX) to get all that in one place.
Minimizing risk through diversification is an important aspect of portfolio construction, especially in retirement. Although the exposure to high-yield bonds (about two-thirds of fund assets) carries its own market risk, FAGIX can put up returns that rival funds with 100% exposure to stocks, with less downside risk. Add in a decent yield and you have a solid holding for retirement.
In addition to high-yield bonds, FAGIX also invests in growth-oriented stocks like Alibaba (BABA), Facebook (FB), and Alphabet (GOOG, GOOGL).
SEC Yield: 1.9%
One of the best types of dividend funds to hold in retirement is the kind that focus on stocks of companies that have a history of increasing dividends. This makes Vanguard Dividend Appreciation Index (VDAIX) a smart retirement portfolio holding even if the headline yield isn't overly impressive right now.
VDAIX passively tracks the NASDAQ US Dividend Achievers Select index, which consists of about 180 stocks like MSFT, JNJ, and PepsiCo (PEP) that have a record of raising their dividends over time. That means the current yield of this dividend fund will grow nicely over time.
This type of mutual fund won't make a list of mutual funds paying the highest dividends of today, but will help to increase dividends in the portfolio in the future. And that's a key strategy for retired investors looking for income.
SEC Yield: 3.4%
A good way to gain exposure to the best dividend stocks is through a sector fund like American Century Utilities (BULIX).
The investment objective for BULIX has the fund maintaining exposure of at least 80% of portfolio assets to utilities stocks like Verizon (VZ), AT&T (T), and Public Service Enterprise Group (PEG).
Utilities stocks also have defensive qualities, meaning they'll typically have less downside risk during a bear market. This is an important quality in a retirement portfolio.
One of the best sectors for dividends is real estate, and Vanguard REIT Index (VGSIX) is a standout in this category of dividend funds.
VGSIX invests in real estate investment trusts, or REITs, which are companies that own income-producing real estate. The VGSIX portfolio pasively tracks the MSCI US REIT Index, which focuses on large U.S. REITs like Simon Property Group (SPG), Equinix (EQIX), and Prologis (PLD).
REIT funds do not have a high correlation to performance of broad market indices, which makes REIT funds smart diversification tools.
SEC Yield: 2.3%
Investors looking for a well-rounded dividend mutual are wise to check out Fidelity Equity Dividend (FEQTX).
Although many investors looking for income from investments are retired, the majority of these investors still need long-term growth. FEQTX provides a solid balance of both income and growth.
The FEQTX portfolio consists of high-quality large-caps like Wells Fargo (WFC), VZ, and Chevron (CVX).
SEC Yield: 2.4%
Some of the best dividend funds to buy include those with a varied approach to income investing like Fidelity Strategic Dividend and Income (FSDIX).
The FSDIX portfolio is a blend of common stocks, REITs, convertible securities and preferred stocks. This diversified approach can be smart for retired investors or for any investor wanting exposure to quality dividend stocks like top holdings MSFT, VZ, and Procter & Gamble (PG).
FSDIX also has a strong long-term performance history, beating 80% of category peers for 10-year annualized returns.
This article is from Kent Thune of InvestorPlace. As of this writing, Thune did not personally hold a position in any of the aforementioned securities.
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