Being an income investor in today’s low-yield environment is a challenge, to say the least. U.S. Treasury bonds are paying near-zero, high-credit-quality corporates and municipals are paying well below 3%, and last week saw record outflows on junk bond funds.
So where should the smart income investor go now? It depends on how much income you need and how much market risk you are willing to take.
Some investors simply want as much yield as they can get without going overboard on principal risk; others need to accomplish the so-called 4% rule for retirement income, which makes certain assumptions about average rates of return and inflation and ensures a high probability that the retirement portfolio account value will not decline to zero in the investor’s lifetime, up to 30 years from the start of retirement.
Or you might be simply looking for the best of both worlds — an equity-income strategy that can take advantage of late-bull market gains while providing dividends to take some of the sting out of a bear market decline.
No matter what your investment strategy, we did some digging and found 3 dividend mutual funds paying higher than 3% now.
Federated Strategic Dividend A (SVAAX)
If you’re looking for dividend mutual funds that go anywhere to find high yields, Federated Strategic Dividend A (SVAAX) can be a good choice for you. The fund management team targets a 5% total yield and considers no stocks with yields below 3%.
As of July 31, SVAAX had heavy allocations to four dividend-rich sectors — consumer staples at 27% of the portfolio, utilities at 20%, energy at 20% and telecom at 13%. Some of the top holdings include Altria Group Inc (MO), AT&T (T), and Duke Energy Corp (DUK).
A below-average expense ratio of 1.05% and a minimum initial investment of $1500 makes SVAAX a well-rounded dividend fund.
There is also a load-waived version, Federated Strategic Dividend A LW (SVAAX.LW).
SunAmerica Dividend Strategy A (FDSAX)
Although SunAmerica Dividend Strategy A (FDSAX) has slipped behind its large value category peers in performance in 2014, it ranked in the top 4% of its category in 2013 and is in the top 1% for the 10-year returns (the longest manager tenure is 7 years).
In addition to the attractive 4.9% 30-day SEC yield, this 5-star rated dividend mutual fund has an expense ratio of 1.13% and an affordable initial investment minimum of $500.
There is also a load-waived version, SunAmerica Dividend Strategy A LW (FDSAX.LW).
Vanguard REIT Index (VGSIX)
Real estate investment trusts (REITs) are known for kicking off serious dividends, and Vanguard REIT Index (VGSIX) is a high-quality, low-cost option among dividend mutual funds. Expenses are rock-bottom for a REIT fund at 0.24% and you only need a $3000 initial investment to get in.
Keep in mind that this fund pays quarterly distributions and its 3.8% payout, as of 7/31/2014, is an “unadjusted effective yield,” which is based on the full amount of REIT distributions (dividend income, as well as return of capital and capital gain).
As of this writing, Kent Thune did not hold a position in any of the aforementioned securities. Under no circumstances does this information represent a recommendation to buy or sell securities.