Buying dividend stocks for income can be a smart move, but buying stock in the companies that consistently grow dividend payouts over time is also a good growth strategy.
The beauty of mutual funds, specifically the low-cost, actively-managed funds, is that an outstanding money manager can accomplish your portfolio management objectives without you having to do the time-consuming research.
And for the investors who prefer to buy their own dividend stocks, looking under the hood of the best dividend funds can be a good way to find the next buying opportunity.
We sifted through dozens of dividend-growth funds to arrive at these three best funds that buy dividend stocks. They don’t all have the highest yields in the mutual fund universe but all three funds have the rare combination decent yields, low-costs, solid management, and long-term growth potential.
Best Funds for Dividend Stocks: Vanguard Dividend Growth (VDIGX)
SEC Yield: 1.96%
Expenses: 0.32%, or $32 for every $10,000 invested
Minimum Initial Investment: $3,000
Investors looking for a low-cost, well-managed mutual fund that focuses on high-quality dividend stocks, will find it in Vanguard Dividend Growth (VDIGX).
VDIGX is designed to provide some income to investors while offering exposure to dividend stocks across all industries. Most of the holdings are stocks of large companies that have both the ability and apparent commitment to grow dividends over time.
Some of these high-quality dividend stocks include United Parcel Service (UPS), Microsoft (MSFT) and ACE Ltd (ACE).
VDIGX not only pays a decent yield, the growth has historically outpaced the S&P 500. For example, the 10-year annualized return of 9.1% easily surpasses that of the S&P 500’s return of 7.8% and it beats 97% of large blend category funds.
Much of the success of VDIGX can be attributed to fund manager Donald J. Kilbride, who has been at the helm of VDIGX for more than 9 years.
Best Funds for Dividend Stocks: Fidelity Growth & Income Portfolio (FGRIX)
SEC Yield: 1.98%
Expenses: 0.63%
Minimum Initial Investment: $2,500
Another outstanding fund that holds dividend stocks with potential to increase dividends over time while looking for long-term growth is Fidelity Growth & Income Portfolio (FGRIX).
The objective of FGRIX is to seek a high total return through a combination of income and capital appreciation through dividend stocks that have potential to increase dividends over time.
The portfolio is a diversified mix of approximately 90% U.S. stocks across all industries with about 10% foreign stocks. The average market cap for the portfolio is large and includes high-quality dividend stocks like JPMorgan Chase (JPM), General Electric (GE) and Apple (AAPL).
The focus on dividend stocks can at times be a drag on returns, and FGRIX has had trouble keeping up with category averages in the past, but performance under the current manager, Matthew W. Fruhan, has averaged high in his 5-year tenure — the 5-year annualized return of 12.9% edges out the average large blend stock fund which is at 12.3% for the period.
Best Funds for Dividend Stocks: Vanguard High Dividend Yield Index (VHDYX)
SEC Yield: 3.09%
Expenses: 0.18%
Minimum Initial Investment: $3,000
If you want a top-notch fund that passively buys and holds dividend stocks with high yields, you’ll like Vanguard High Dividend Yield Index (VHDYX).
Although VHDYX isn’t actively-managed, and therefore doesn’t have a specific objective of buying dividend stocks with potential for higher dividend payouts in the future, the fund’s passive nature gets the same job accomplished.
VHDYX tracks the FTSE High Dividend Yield Index, which consists of U.S. companies that are dedicated to consistently paying larger-than-average dividends.
Some of these companies in the top holdings of VHDYX include Exxon Mobil (XOM), Wells Fargo (WFC) and Johnson & Johnson (JNJ).
In addition to the above-average yields, the low-cost, passive style for VHDYX helps contribute to top notch performance, which has consistently averaged ahead of the large-cap value category of mutual funds.
As of this writing, Kent Thune did not personally hold a position in any of the aforementioned securities. His No. 1 holding is his privately held investment advisory firm in Hilton Head Island, SC. Under no circumstances does this information represent a recommendation to buy or sell securities.
