Dividend mutual funds are investments that pay out dividends per share based on select criteria.
If you are thinking about investing in a mutual fund, then it is important to understand the many different types available. Each one is tailored toward slightly different investment strategies, goals, or philosophies. One popular type of mutual fund is a dividend mutual fund. Let’s take a closer look at this type of fund to see if it meets your needs.
What a Fund Focuses On
Different types of mutual funds will use different sets of criteria in order to choose the best stocks. In a dividend mutual fund, the primary criteria used is the dividend yield. Typically, stocks will not be chosen unless they pay a dividend, and stocks that pay higher dividends are preferred to stocks that pay lower dividends. The primary advantage of a dividend mutual fund is that it will provide you with a nice steady stream of income. Either you can choose to have your dividends reinvested into the mutual fund, or you can choose to receive a dividend check periodically. This is a great portfolio to have if you are retired or if you would like to see some steady earnings from your stocks.
Drawbacks of Dividend Mutual Funds
Although dividend mutual funds can provide many benefits to investors, there are some drawbacks, as well. One drawback is that if a fund manager looks solely at the dividend yield in order to choose which stocks to buy, then he may make some unwise decisions. Sometimes a stock price will be depressed because a company has had low earnings for the past year, but the dividend has not yet reflected this. The market already expects the dividend to be cut, but without the proper research, this fact may be elusive to a fund manager. Another disadvantage to dividend stocks is that they are typically mature companies that make steady earnings. Some people consider this extremely desirable in a stock, but the downside is that it is unlikely that any stock in a dividend mutual fund will experience a meteoric rise in the stock price. Instead, you can expect slow and steady earnings.
“Invest Wisely: Mutual Funds.” U.S. Securities and Exchange Commission(Home Page). N.p., n.d. Web. 8 Nov. 2010. http://www.sec.gov/investor/pubs/inwsmf.htm.
Mutual Funds vs. Exchange Traded Fund.” Fool.com: Stock Investing Advice | Stock Research. N.p., n.d. Web. 8 Nov. 2010. http://www.fool.com/investing/etf/mutual-funds-v-etfs.aspx.