There are three big ways for investors to pursue the income that dividend stocks can supply, especially in a retirement portfolio. One is to pursue the very highest dividends in the market, but that is often a fool’s errand because the highest payouts typically come from either very cyclical industries like oil or from “fallen angels,” whose dividend yields are such a high percentage of their stock prices because problems in the business have caused the stock to lose more value than any dividend will soon replace.
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The best dividend mutual funds use more subtle strategies, says Todd Trubey, senior manager and research analyst at fund research and data powerhouse Morningstar. One is simply to track current yields, usually with risk controls like sticking to companies that have consistently raised their dividends. The other school looks at dividend-paying companies that also have consistently strong growth in cash flow from their underlying business, suggesting more dividend growth to come. And that doesn’t count growth-oriented funds that also consider dividends, which are more about capital appreciation, with dividends as kind of a bonus.
“One overarching thing is that income is always a central part of total return,” Trubey said. “People often ignore it. The thing about dividends is, they are cash money. These are not corporate earnings. These are real.”
Trubey and Morningstar’s Susan Dziubinski identified these seven as being among the cream of the mutual fund crop:
| Mutual fund | Trailing dividend yield as of July 20 |
| Vanguard High Dividend Yield Index Fund (ticker: VHYAX) | 3.1% |
| Vanguard Dividend Appreciation Index Fund (VDADX) | 1.9% |
| T. Rowe Price Equity Income (PRFDX) | 2.2% |
| T. Rowe Price Dividend Growth (PRDGX) | 1.2% |
| Columbia Dividend Income (GSFTX) | 2% |
| American Funds American Mutual Fund (AMRMX) | 1.9% |
| BlackRock Equity Dividend Fund (MADVX) | 1.9% |
Vanguard High Dividend Yield Index Fund (VHYAX)
This $49 billion fund offers a 3.1% trailing-12-month yield, more than double the 1.5% payout for the S&P 500, Trubey said. It does not screen out fallen angels, but with 462 stocks in its portfolio the risk to the fund from a few companies’ drop in value is low, he said.
Like most dividend funds, this one offers downside protection in bad markets — its 2022 loss was just 0.4% of value. The bad part is that dividend funds, which by definition exclude growth companies that don’t pay dividends, underperform in fast-rising markets like 2023. This year, it is down 0.4%, though dividends boost total return to 2.5% through July 20, according to Vanguard. The fund has a low expense ratio of 0.08%, or $8 annually for every $10,000 invested.
Vanguard Dividend Appreciation Index Fund (VDADX)
This $13 billion fund’s yield is 1.9%, Trubey said, but its emphasis on finding companies with the ability to increase dividends in the future leads it to more stocks with high growth prospects than many dividend funds. That’s why it’s up more than 8% this year, with a total return of nearly 10%. Its expense ratio is 0.08%.
The 314 stocks it owns are most concentrated in information tech — not a typical choice for a dividend fund. This is a fund where mature growth names like Microsoft Corp. (MSFT) and Apple Inc. (AAPL) in the portfolio that have settled into paying — and boosting — regular dividends over time, are blended with more traditional dividend fund names like Johnson & Johnson (JNJ) and Exxon Mobil Corp. (XOM).
T. Rowe Price Equity Income (PRFDX)
This $17 billion large-cap fund is another that has come close to keeping up with the S&P 500 even while mitigating risk. Managed since 2015 by veteran T. Rowe star John Linehan, it has a yield of 2.2% and a 10-year average total return of 8.4%, trailing the Russell 1000 Value Index benchmark by about half a percentage point per year and lagging slightly behind the large-cap value average. The fund charges 0.67% of assets as an expense ratio.
Like other equity income funds, its goal is to blend some capital return with enough income to put a floor under shares of the fund. Right now, that means financial stocks are its biggest bet as a group, followed by health care and industrials, and its top holdings are the utility company Southern Co. (SO) and megabank Wells Fargo & Co. (WFC). Three insurance companies are in the top 10 holdings.
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T. Rowe Price Dividend Growth (PRDGX)
This is T. Rowe’s version of Vanguard’s Dividend Appreciation Fund, with a 13.4% one-year return driven partly by its big investments in top holdings Apple, Microsoft and Visa Inc. (V). It has a little more international flavor than most funds of its kind, with 90% U.S. stocks in the portfolio, compared with a category average of 95%. Its yield is low for a dividend fund at 1.2%, but the total return has been there.
Ten-year returns work out to 12.1% annually, slightly trailing the S&P 500, which T. Rowe calls the fund’s benchmark. But PRDGX’s long-run returns are ahead of the average fund in its large-blend category, according to Morningstar. Its expense load is 0.64% of assets.
Columbia Dividend Income (GSFTX)
Led by manager Michael Barclay, this $37 billion fund with five stars from Morningstar uses a proprietary formula to seek out low-volatility investments with a history of dividend growth and defensible business models, Trubey said. This approach has produced a portfolio concentrated in only 79 of the 1,008 stocks in its benchmark index, the Russell 1,000, with a lower price-to-earnings ratio overall and a 2% yield.
Top investments include Microsoft, Cisco Systems Inc. (CSCO) and Broadcom Inc. (AVGO) from the tech world, energy giants Exxon Mobil and Chevron Corp. (CVX), and consumer names Home Depot Inc. (HD) and Procter & Gamble Co. (PG). The fund, which has an expense ratio of 0.64% of assets, has beaten 93% of its category peers over a 10-year period, according to Morningstar.
American Funds American Mutual Fund (AMRMX)
This $91 billion four-star fund has been around for more than 70 years, Trubey said. It’s managed with conservatism in mind, seeking established companies with strong balance sheets and a history of consistently paying dividends, helping to provide downside resilience, the fund’s sponsor says.
With an expense ratio of 0.58% and a yield of 1.9%, the fund has beaten its large-value peers by outperforming in down markets since 2013, and in years with tepid growth, Morningstar says. One measure of its conservatism is that only 12% of the portfolio is in tech. Along with Microsoft and Apple, its top holdings include drugmaker AbbVie Inc. (ABBV), cable giant Comcast Corp. (CMCSA) and long out-of-favor conglomerate General Electric Co. (GE), which has doubled in the past year.
BlackRock Equity Dividend Fund (MADVX)
This $19.5 billion four-star fund has the distinction of having beaten both its category average and its Russell 1000 benchmark index over the last decade, returning 9.8% a year including dividends that currently are at 1.9% of the fund’s price.
Its score from Morningstar gets dinged, if only a little, for being a little bit more aggressive than some other dividend funds. BlackRock says its worst three-month period was a 10.3% loss in the second quarter of 2022. Its expense ratio is 0.68% of assets.
Almost half of the fund is in financial services and health care stocks. Top holdings include Wells Fargo, Baxter International Inc. (BAX) and Kraft Heinz Co. (KHC), which has a 4.4% yield.
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7 of the Best High-Dividend Mutual Funds originally appeared on usnews.com
