5 Best Dividend Funds for the Fall

by Jeff Reeves | October 14, 2013 7:00 am

fund1851 5 Best Dividend Funds for the Fall[1]There’s a lot of trouble on the horizon right now for U.S. stocks, given the broader market volatility amid the debt ceiling debacle and a general pessimism around Q3 earnings, which are likely to show little growth for corporate profits.

The bond market isn’t much better, with fears over the U.S. debt rating and the broader risk of rising interest rates at the Federal Reserve harming the value of longer-duration bonds.

That means this fall is the perfect time to consider dividend stock funds. You can get the income that makes bonds attractive as well as play stocks in a low-risk way.

Of course, no investment is wholly without risk. So that’s why the best option for dividend investors is to focus on mutual funds and ETFs that offer a diverse group of holdings. These dividend funds will then spread your risk around, into different companies and sectors and even different nations.

If you’re looking for some great income investments this fall, here are five dividend funds that should be at the top of your list:

SPDR S&P International Dividend ETF

StateStreetSPDR185 5 Best Dividend Funds for the Fall[2]Dividend Yield: 6.8%

If you don’t mind some of the risk that comes with investing abroad, you can supercharge your yield via the SPDR S&P International Dividend ETF (DWX[3]). This exchange-traded fund has an impressive yield of 6.8% and focuses on large-cap issues outside the United States.

Given that investing in foreign companies is harder for U.S. investors — either because certain stocks don’t trade on domestic exchanges, because financial information is harder to understand or because dividends only come once or twice a year — this is a great option for both global diversification as well as income. For an annual fee of 0.45%, or $45 on every $10,000 invested, you’ll be able to tap into an asset class that might be impractical otherwise.

Holdings right now include Belgacom, a Belgian telecommunications company; Ferrovial, a Spanish infrastructure company; and TDC, a Danish media giant.

Just be warned that international equity hasn’t done extraordinarily well in the last few years, so DWX hasn’t budged since spring of 2009 despite the S&P 500 roughly doubling in that same period.

However, many investors think that a rotation out of U.S. stocks is due after the big rally this year for American companies. If the U.S. falls out of favor, you could benefit from some international exposure — and the DWX fund gives you income to boot.

Vanguard Dividend Growth Mutual Fund

Vanguard 5 Best Dividend Funds for the Fall[4]Dividend Yield: 2.1%

The Vanguard Dividend Growth Fund (VDIGX[5]) has a great long-term track record, posting an annual return of nearly 8% a year since its inception in 1992, with an even more impressive 10-year return of 9.5% annually between 2003 and present day.

The fund is your quintessential low-risk, large-cap income fund with 20% allocated in healthcare and 13% in consumer staples to provide stable performance over the long-term in addition to great yield. Top stocks right now include McDonald’s (MCD[6]), Johnson & Johnson (JNJ[7]), Microsoft (MSFT[8]) and Walmart (WMT[9]).

While VDIGX’s holdings might not generate huge income — with the current yield measuring about 2.1% — the distributions are very stable, and the overall stability thanks to these megacap components is very enviable for low-risk investors.

And if you worry about things getting rocky for amid a cooling housing market and the debt ceiling debacle, then this low-risk fund has a lot of appeal beyond just its dividend yield.

Portfolio manager Don Kilbride is a top-notch value investor and has been running the fund with great success since 2006. And with a rock-bottom expense ratio of 0.29%, investors are charged just $29 annually for every $10,000 invested to tap into Kilbride’s know-how.

Global X SuperDividend ETF

GlobalX185 5 Best Dividend Funds for the Fall[10]Dividend Yield: 6.5%

If you’re just chasing yield, then consider the Global X SuperDividend ETF (SDIV[11]), which has a strategy that sounds exactly like you would expect — a focus on big dividends, with a 6.5% yield right now — and a 12-month yield that is 7.9% based on the past year of dividends instead of just current payout rates.

SDIV gets its yield from a wide array of holdings. They range from R.R. Donnelley & Sons (RRD[12]), a midcap U.S. stock in the communications sector, to Electricite de France, a $45 billion French utility.

This dividend fund doesn’t have a long track record, and has been mostly flat across 2012 and 2013. However, those looking for big yield without a lot of focus on share appreciation could find big income potential in SDIV. Given the fact that the market seems to be struggling to find its way, a sideways market is likely in the fall and into 2014 — meaning that big dividends are your best chance to get paid.

Expenses are modest at 0.58%, or $58 per year on $10,000 invested.

Huntington Dividend Capture Fund

huntington 5 Best Dividend Funds for the Fall[13]Dividend Yield: 4.8%

An intriguing dividend fund out there is the Huntington Dividend Capture Fund (HDCTX[14]), which mixes a trading strategy with dividend stocks — entering positions before the ex-dividend date, capturing the payout, then rotating into another income opportunity.

In fact, the fund turnover is 109% annually — meaning the entire portfolio changes in less than a year. That’s in stark contrast to other income funds that are between 10% and 15% as they park cash in stocks for the long haul. HDCTX’s current top holding is another fund — the SPDR S&P Dividend ETF (SDY[15]), at 2.5% — followed by General Electric (GE[16]) and Exxon Mobil (XOM[17]) … but that can and will change in a hurry.

Now, this trading comes at a price. Expenses are a steep 1.37% — much higher than other funds listed here — and there are additional transaction fees associated with this fund to boot.

But the current yield is 4.8% and the 10-year returns are almost 6.4% overall.

This kind of investment doesn’t work in a market that is rallying broadly, since obviously simply being in index funds was the best move in 2013 so far. However, if the market gets choppier or more selective in the coming months, then a trading angle in your income portfolio might be the best way to minimize downside risk while still capturing significant yield.

Vanguard Dividend Appreciation ETF

Vanguard 5 Best Dividend Funds for the Fall[4]Dividend Yield: 2.1%

If all of these strategies sound risky, then your best bet is to just index it and forget it — not just in the fall, but into 2014 and beyond. The best investment to do that is the Vanguard Dividend Appreciation ETF (VIG[18]).

This exchange-traded product is one of the 13 largest ETFs offered on Wall Street — at least measured by assets, with over $17 billion under management. The yield is 2.1%.

But though the scale is big asset-wise, the expense is very low when it comes to fees. VIG charges just 0.1% in expenses, or a measly $10 annually for every $10,000 invested.

This ETF is benchmarked to the Nasdaq U.S. Dividend Achievers Select Index, so it’s passively managed based on that set list of stocks. The sector breakdown is weighted toward consumer goods, with more than 23% allocation right now, and industrials coming in a close second at 22% of the ETF’s portfolio.

Specifically, top holdings are Procter & Gamble (PG[19]), PepsiCo (PEP[20]), Walmart (WMT[9]) and Chevron (CVX[21]). The ETF launched in 2005, and its annual returns since inception are about 6.7% annually.

If you’re simply looking for a cheap and low-risk income fund that is easy to access, then the VIG is one of the biggest and best products out there.

Jeff Reeves[22] is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks.[23] As of this writing, he did not hold a position in any of the aforementioned securities. Write him at editor@investorplace.com[24] or follow him on Twitter via @JeffReevesIP[25]

Endnotes:
  1. [Image]: http://investorplace.com/wp-content/uploads/2013/03/fund1851.jpg
  2. [Image]: http://investorplace.com/wp-content/uploads/2012/08/StateStreetSPDR185.jpg
  3. DWX: http://studio-5.financialcontent.com/investplace/quote?Symbol=DWX
  4. [Image]: http://investorplace.com/wp-content/uploads/2011/12/Vanguard.jpg
  5. VDIGX: http://studio-5.financialcontent.com/investplace/quote?Symbol=VDIGX
  6. MCD: http://studio-5.financialcontent.com/investplace/quote?Symbol=MCD
  7. JNJ: http://studio-5.financialcontent.com/investplace/quote?Symbol=JNJ
  8. MSFT: http://studio-5.financialcontent.com/investplace/quote?Symbol=MSFT
  9. WMT: http://studio-5.financialcontent.com/investplace/quote?Symbol=WMT
  10. [Image]: http://investorplace.com/wp-content/uploads/2013/09/GlobalX185.jpg
  11. SDIV: http://studio-5.financialcontent.com/investplace/quote?Symbol=SDIV
  12. RRD: http://studio-5.financialcontent.com/investplace/quote?Symbol=RRD
  13. [Image]: http://investorplace.com/wp-content/uploads/2011/07/huntington.gif
  14. HDCTX: http://studio-5.financialcontent.com/investplace/quote?Symbol=HDCTX
  15. SDY: http://studio-5.financialcontent.com/investplace/quote?Symbol=SDY
  16. GE: http://studio-5.financialcontent.com/investplace/quote?Symbol=GE
  17. XOM: http://studio-5.financialcontent.com/investplace/quote?Symbol=XOM
  18. VIG: http://studio-5.financialcontent.com/investplace/quote?Symbol=VIG
  19. PG: http://studio-5.financialcontent.com/investplace/quote?Symbol=PG
  20. PEP: http://studio-5.financialcontent.com/investplace/quote?Symbol=PEP
  21. CVX: http://studio-5.financialcontent.com/investplace/quote?Symbol=CVX
  22. Jeff Reeves: http://slant.investorplace.com/author/profile/jeff-reeves/
  23. The Frugal Investor’s Guide to Finding Great Stocks.: http://www.amazon.com/dp/B007KB9CSI/ref=rdr_kindle_ext_tmb
  24. editor@investorplace.com: mailto:editor@investorplace.com
  25. @JeffReevesIP: http://twitter.com/JeffReevesIP

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