Unless you invested in select areas of the markets — like the Internet giants and cloud operators — it’s been challenging year. Note that the return on the S&P 500 has been a mere 3%.
Now a leveling off should not necessarily be a surprise. Last year was particularly strong.
Yet there are still some fundamental issues with equities. As the U.S. economy is at full employment, there are fears of inflation. Already the Federal Reserve has been taking action with higher interest rates.
Then, there is the wildcard of protectionism from the Trump Administration. Given the importance of world trade, there could easily be a slowdown in economic growth if there is not a quick resolution.
So what is an investor to do? One approach is to look for mutual funds that focus on dividend plays, especially for high quality companies. Such investments are likely to be better able to withstand the volatility.
Here are 5 funds to consider:
Dividend Mutual Funds #1: Vanguard Dividend Appreciation Index Fund Investor Shares
When it comes to mutual funds, the expense ratio is critical. The lower it is, the more gains are available for investors. It’s as simple as that.
And yes, Vanguard is a leader in low-cost funds. Just look at the Vanguard Dividend Appreciation Index Fund Investor Shares (MUTF:VDAIX), which has $35 billion under management. Keep in mind that the expense ratio is a mere 0.15% and the turnover is only 0.14%.
Granted, the overall yield is still moderate, at nearly 2%. But it’s important to note that high-dividend fund rates can be an indication that a fund is taking on quite a bit of risk.
As for the VDAIX fund, the mandate is to look for those investments that have a solid history of raising dividends. That is, to meet the cut, a company must have raised its dividend yield for the past 10 years. Some of these include Johnson & Johnson (NYSE:JNJ), McDonald’s (NYSE:MCD) and 3M Co (NYSE:MMM).
Dividend Mutual Funds #2: Vanguard REIT Index Fund
A great place to find attractive dividend yields is with REITs (Real Estate Investment Trusts). These companies generally have consistent cash flows from rents and there are tax incentives to distribute at 90% of cash flows to investors.
The timing may be good for REITs as well. This year, the category has come under pressure, especially as seen with those operators that have exposure to mall locations.
A good way to play REITs is the Vanguard Real Estate Index Fund Investor Shares (MUTF:VGSIX) fund, which has roughly $60 billion in assets. This fund has a diverse portfolio, spanning the key areas like hotels, office space, apartments and even cell-phone tower properties.
As with many other Vanguard offerings, the VGSIX fund has a reasonable expense ratio of 0.26%. The yield is also 3.5%.
Dividend Mutual Funds #3: MFS® Utilities Fund Class I
Utilities are usually far from exciting. Let’s face it, you’ll likely not get the kinds of returns as seen from a hot growth fund. But then again, utilities generally provide robust, consistent yields.
One example of this is the MFS® Utilities Fund Class I (MUTF:MMUIX) fund, which has $3.4 billion in assets. Consider that the yield is 3.4%.
The manager of the fund, Maura Shaughnessy, has been at the helm since 1992. And during this tenure, she has consistently ranked at the top among her peers. Her average annual return during this period was an impressive 10.16%.
A key to the success for Shaughnessy is that she is opportunistic. For the most part, she tries to find values in any areas of the utilities category, including in foreign markets. Currently about 34% of the portfolio consists of non-US securities.
Dividend Mutual Funds #4: Fidelity® Capital & Income Fund
In today’s markets, it’s really tough to find high-yield stocks. Part of this has been due to the long bull market.
This is why some dividend funds will also expand their mandates and look to bonds.
So then what’s a good example of this? Well, one is the Fidelity® Capital & Income Fund (MUTF:FAGIX), which has $12 billion in assets. The yield is an attractive 4%.
While the ratio of stocks-to-bonds in the portfolio varies, it is currently 66% of fixed income. Interestingly enough, the fund also has a tolerance for taking risks, say be investing in junk bonds and even defaulted securities. But the diversification in the portfolio helps to mute the risks.
As for the stocks, the fund sticks generally to larger cap companies, such as Mastercard Inc (NYSE:MA).
Dividend Mutual Funds #5: Columbia Dividend Income Fund Advisor
It’s true that the 2% dividend yield on the Columbia Dividend Income Fund Advisor Class (MUTF:CVIRX) fund seems kind of underwhelming. Yet this is actually fairly good — that is, in light of the conservative portfolio.
The manager of the fund, Scott Davis (who came on board 20 years ago), focuses on free cash flows. This metric not only indicates that the company is highly profitable but has the resources to maintain its dividend yield.
With a portfolio turnover of 16%, Davis also takes a long-term approach. Although, he is not afraid to unload positions if the fundamentals deteriorate.
Tom Taulli is the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
Legendary Investor Louis Navellier’s #1 Stock to Buy NOW
Louis Navellier — the investor the New York Times called an “icon” — just helped investors make 487% in the booming Chinese stock market … 408% in the medical device sector … 150% in Netflix … all in less than 2 years! Now, Louis is urging investors to get in on what may be the opportunity of a lifetime. By using a unique investment strategy called “The Master Key,” you could make hundreds of percent returns over the next few years. Click here to learn about the #1 stock recommendation from one of America’s top investors.