If you’re looking for the best dividend funds for your 401(k) plan, whether you’re an employee investing for retirement or an employer looking for good funds to include your plan, there are a handful of key qualities to look for.
Dividend funds can be a wise investment type for almost any investor. But not all dividend funds are made the same, and certainly not every dividend fund is a good idea.
To find the best dividend funds for a 401(k) plan, here are the top qualities to look for:
Low Expenses: Funds that have sales charges can’t be used in 401(k) plans and funds with high expense ratios do not generally outperform the category averages or key benchmarks in the long run.
Yields: Notice I didn’t say “highest yields.” While high yields can make a good dividend fund, it’s not all about yield when buying the best funds and certainly not for investing in a long-term savings vehicle like a 401(k)
Returns: If it’s an index fund, performance should be close to the benchmark. For actively managed funds, long-term returns ahead of the category average is ideal.
With these qualities in mind, here are the best dividend funds for your 401(k):
Dividend Funds for Your 401(k): Vanguard High Dividend Yield Index (VHDYX)
Expense Ratio: 0.15%, or $15 annually on a $10,000 investment
SEC Yield: 2.9%
If you want one of the best mutual funds that combines low cost with high yield, Vanguard High Dividend Yield Index (MUTF:VHDYX) is smart choice.
VHDYX passively tracks the FTSE High Dividend Yield Index, which consists of nearly 400 stocks of U.S. companies that pay above-average dividends, such as Microsoft Corporation (NASDAQ:MSFT), JPMorgan Chase & Co. (NYSE:JPM), and Johnson & Johnson (NYSE:JNJ).
Not only do investors get a broad selection of U.S. stocks that pay dividends, the passive nature allows for lower expenses, which can translate to long-term performance that beats category peers.
Dividend Funds for Your 401(k): Vanguard Dividend Appreciation Index (VDAIX)
Expense Ratio: 0.17%
SEC Yield: 1.8%
A smart strategy for buying dividend funds is to hold a low-cost fund like Vanguard Dividend Appreciate Index (MUTF:VDAIX), which invests in companies that have a history of increasing dividends.
VDAIX tracks the NASDAQ US Dividend Achievers Select index, which consists of about 180 stocks like MSFT, JNJ and 3m Co (NYSE:MMM) that have a record of raising their dividends over time. That means the current yield of this dividend fund won’t be the highest in the category, but it will move the needle higher.
401(k) investors aren’t looking for current income but they may prefer dividend stocks with good long-term prospects. VDAIX is that fund.
Dividend Funds for Your 401(k): Fidelity Capital & Income (FAGIX)
Expense Ratio: 0.73%
SEC Yield: 3.7%
Sometimes dividend funds get high yields by combining stocks with bonds, and Fidelity Capital & Income (MUTF:FAGIX) is one of the best funds to pull off this combination of qualities.
Minimizing risk through diversification is an important aspect of long-term investing, especially in a 401(k) plan. Although the exposure to high-yield bonds (about two-thirds of fund assets) carries its own market risk, FAGIX can put up returns that rival funds with 100% exposure to stocks, with less downside risk. Add in a decent high yields from dividend stocks and you have a well-balanced mutual fund.
Best Dividend Funds for Your 401(k): Fidelity Strategic Dividend & Income (FSDIX)
Expense Ratio: 0.76%
SEC Yield: 2.3%
Some of the best dividend funds to hold in a 401(k) are funds that have a varied approach to investing like Fidelity Strategic Dividend and Income (MUTF:FSDIX).
The FSDIX portfolio combines growth and value for a mix that offers investors exposure to quality dividend stocks that also have long-term growth potential. This diversified approach can be smart for 401(k) investors or for any investor wanting exposure to solid holdings like MSFT, JNJ and JPM.
FSDIX also has a strong long-term performance history, beating nearly 80% of category peers for 10-year annualized returns.
Best Dividend Funds for Your 401(k): Vanguard Real Estate Index (VGSIX)
Expense Ratio: 0.26%
SEC Yield: 3.89%
Sector funds are not common in 401(k) plans but if you wanted to see a sector fund with high potential for dividends, you’d want to see a fund like Vanguard Real Estate Index (MUTF:VGSIX).
VGSIX invests in real estate investment trusts, or REITs, which are companies that own income-producing real estate. The VGSIX portfolio is set to move from its current benchmark to the the MSCI US Investable Market Real Estate 25/50 Index, sometime in the third quarter of 2018. Trusting Vanguard’s judgement on tracking indices has been wise for investors in the past and this case appears to be no exception to that rule.
In addition to dividend and yield qualities, REIT funds do not have a high correlation to performance of broad market indices, which makes them smart diversification tools.
*Note: This yield, according to Vanguard, is the fund’s “current unadjusted effective yield which is based on the full amount of REIT distributions.” It’s not the same as an SEC Yield.
Best Dividend Funds for Your 401(k): Vanguard International High Dividend Index (VIHIX)
Expense Ratio: 0.42%
Dividend Yield: 3.05%
Investing in international stocks is a good way to add diversity to a portfolio, and this makes funds like Vanguard International High Dividend Index (MUTF:VIHIX) a good choice for 401(k) investors wanting overseas dividend stocks.
VIHIX is a passively managed fund that tracks the FTSE AW ex US High Dividend Yield Index, which is a cap-weighted index consisting of about 850 foreign stocks, each of which are expected to produce yields that are above average.
The VIHIX portfolio provides exposure to developed and emerging economies outside the U.S. Most of the holdings are foreign large-cap names like Royal Dutch Shell (OTCMKTS:RYDBF), Nestle (OTCMKTS:NSRGY) and Taiwan Semiconductor (NYSE:TSM).
Best Dividend Funds for Your 401(k): Fidelity Telecom & Utilities (FIUIX)
Expense Ratio: 0.57%
SEC Yield: 2.1%
One of the sectors synonymous with dividends is utilities and Fidelity Telecom & Utilities (MUTF:FIUIX) is a quality fund in this space.
The FIUIX portfolio consists primary of large electric utilities stocks and telecom companies in the U.S. Therefore, shareholders get a healthy does of stocks like Verizon Communications Inc. (NYSE:VZ), NextEra Energy Inc (NYSE:NEE) and T-Mobile (NASDAQ:TMUS).
Utilities can add diversity to a portfolio and provide dividends and these qualities combine for a solid 401(k) investment.
As of this writing, Kent Thune did not personally hold a position in any of the aforementioned securities. Under no circumstances does this information represent a recommendation to buy or sell securities.