When it comes to investing in dividend funds, there are a few trade-offs to be aware of. Of course, everyone is looking for low-cost dividend funds, and yet low-cost dividend funds usually mean passively managed exchange-traded funds or mutual funds. That’s fine, as long as the stocks held in these low-cost dividend funds aren’t terribly volatile, and the dividend yield is reasonable.
That’s just one trade-off. Expenses are going to rise as you move into higher-yielding securities that require more active management.
While there are some good low-cost dividend funds out there, it is these trade-offs that I want to highlight so that investors think a little more broadly about how to construct a proper portfolio.
The Liberty Portfolio, my investment advisory newsletter, creates a long-term diversified portfolio with both growth and income elements, and it includes income securities that don’t have these trade-offs.
Still, if you’re looking for the absolute lowest possible fees for your low-cost dividend funds, that tries to also aim for a decent dividend yield, here are three suggestions.
Low-Cost Dividend Funds: iShares Core High Dividend ETF (HDV)
If you’re looking for a straightforward choice as far as low-cost dividend funds go, consider iShares Core High Dividend ETF (NYSE:HDV). This has all of the mega Names you know and love, with the top 10 positions accounting for about 57% of the asset base. 80% of the portfolio is made up of giant-cap companies, with the rest mostly devoted to large-cap stocks. The 12-month yield is 3.58%, and the expense ratio is ultra low at 0.08%.
The five-year average annual return for the fund is 9% and it has a standard deviation of 9. That means in any given year there is a 95% probability that the fund will return between -9% and +27%.
Be advised, however, that the market as a whole, which is weighted towards many of the names in this fund, is at it’s third most expensive point ever. We are overdue for a correction and a 3.58% yield is going to seem paltry if this fund falls 20%.
Low-Cost Dividend Funds: WisdomTree US Small-Cap Dividend ETF (DES)
You can take an entirely different approach with the WisdomTree US Small-Cap Dividend ETF (NYSE:DES). This four-star Morningstar rated fund has an expense ratio of 0.38%, and it offers a 12-month yield of 2.9%. The dividend isn’t enormous, but if you have a greater appetite for risk, you can still earn that dividend while investing in some of the more interesting small-cap stocks in the market.
In this case, by investing in small cap securities, you are investing in significant future growth for companies that are closer to the beginning of their lives. That means that as companies grow and become more successful, their cash flow will continue to grow and they should theoretically increase their dividends. Also because their prices are rising, the dividend yield will never be all that great.
There is more risk here, however. The 10-year average annual return for the fund is 9.7%, but it has a standard deviation of 20. That means there is a 95% chance that in any given year, the return will be between -31% and +49%.
Low-Cost Dividend Funds: Fidelity Strategic Income Fund (FSICX)
Fidelity Strategic Income Fund (MUTF:FSICX) is also a four-star Morningstar rated fund, with a yield of 3.33%. It is absolutely fair to argue that the 0.69% expense ratio doesn’t really qualify this bond-centered fund as one of the lowest-cost dividend funds in the universe. However, it is not out of line for funds of its ilk.
The fund invests in high-yield securities, U.S. government and investment-grade securities, emerging market securities and foreign developed markets: 45% of the fund is devoted to high-yield investments.
The risks here are not as broad as with dividend securities. The fund has an average annual return over the past 10 years of 5.9% with a standard deviation of 6.3, meaning it has a 95% probability of returning between -6.7% and +18.5% in any given year.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance and is the Manager of The Liberty Portfolio at www.thelibertyportfolio.com. He does not own any stock mentioned. He has 23 years’ experience in the stock market, and has written more than 2,000 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.