The WORST Dividend Mutual Fund!

| July 7, 2014 | 0 Comments

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Thinking about a good dividend mutual fund?

Stop and think about something else, because no matter what dividend mutual fund you invest in, you’re in for an expensive ride.

You should never buy any mutual fund for dividend investing.

There are better ways to go. Better ways to diversify your investment, and better ways to keep your costs down.

The landscape is changing, you have more choices, and when it comes to dividend investing, the smart choices don’t involve mutual funds.

In a world where ETFs are capturing more attention- and more dollars – with their attractive low fees, why should a dividend investor even consider a mutual fund?

In most cases, you shouldn’t. An ETF is the smarter choice.

As ETFs claw away at mutual funds, the competition has drawn the attention of some of the mutual fund companies. We are seeing lower fees, which give investors good reasons why they should take a look at the opportunities mutual funds provide.

But the fees are all over the board. It’s not unusual to find a fund – a fairly well performing fund – where the fees are three times as high as another fund.

Where Does Your Money Go?

Mutual funds make money by collecting ongoing expenses and sales load fees. Many funds are “No-Load” funds, and they collect a management fee to cover their expenses and provide a profit margin. The expenses include:

  • Portfolio management
  • Administration of the fund
  • Day-to-day accounting and pricing
  • Marketing and shareholder services
  • Distribution charges (12b-1 fees)

But if you’re thinking about mutual funds, keep in mind that fees aren’t the only issue.

To understand this other problem that can cause grief for investors, let’s look at things from the perspective of the mutual fund manager.

The Constant Headache That Pounds Away At Fund Managers

It’s a migraine that throbs away every day and it never goes away.

Let’s say you’re managing a fund and you’d like to buy stocks that are paying higher yielding dividends.

Right off the bat, you hit the pain of low trading volume.

You go through your screens and you find four or five stocks that meet your criteria. They are paying nice yields, healthy, and not unreasonable.   The payout ratio looks good, and you figure there’s a very real opportunity for the dividend to keep being paid.

But there are only a few hundred thousand shares a day being traded.

This makes it tough for a fund manager to stake out a strong position.

You see, if you’re a fund manager, you need to buy enough shares for the fund’s portfolio to make an impact on overall performance.

The numbers usually don’t work. Low trading volume translates into a constant headache for the fund manager.

Even the smartest fund managers are boxed in. The size of the fund strips away their flexibility. Small cap stocks with attractive yields and relatively low trading volume just aren’t a good fit.

So the fund managers are forced to pick sub-par stocks.

This is the fund manager’s problem.

You have challenges of your own. You’re looking for smart diversification without high fees.

What’s The Solution For The Dividend Investor?

Invest in an ETF.


Lower fees. True diversification. Greater trading flexibility.

Which ETFs should be on your radar? Here are 7 of our favorites.

State Street High Yield Dividend Aristocrats (SDY)

This ETF tracks the S&P High Yield Dividend Aristocrats Index. It follows roughly 60 stocks, all high-quality companies where the dividend has been increased for at last 25 years in a row.

ProShares S&P 500 Aristocrats ETF (NOBL)

Another ETF which tracks the S&P 500 Dividend Aristocrats Index.

iShares Select Dividend (DVY)

This ETF tracks the Dow Jones U.S. Select Dividend Index. It can be considered a mid-cap value fund.

Vanguard Dividend Appreciation Index ETF (VIG)

This ETF, an exchange traded fund, focuses on NASDAQ stocks that are “dividend achievers”. The Dividend Achievers was launched by Moody’s Investor Service (now Mergent) in 1979 to identify leading dividend-paying companies.

Vanguard High Dividend Yield Index ETF (VYM)

This tracks the performance of the FTSE High Dividend Yield Index. This index reflects the performance of common stocks where dividends are typically above average.

iShares S&P U.S. Preferred Stock Index Fund (PFF)

This ETF tracks 220 preferred stocks from 44 U.S. companies. It is for the dividend investor who is focused on capturing a high yield. Many of these companies are in the financial sector. Keep in mind that preferred stocks are different from common stocks, and are actually very similar to bonds. Their value goes up when interest rates go down, and vice versa.

WisdomTree SmallCap Dividend Fund (DES)

This fund tracks the price and yield performance of the WisdomTree SmallCap Dividend Index.

Look, at the end of the day, you want to dodge The Dividend Mutual Fund Headache. Forget about trying to chase a high yield with a mutual fund.

Remember, no matter how good a job the fund manager does, you’re behind the eight ball because of fees.

And because the fund manager is constantly challenged by trying to find high yields in a world of low volume, the pain never goes away.

Focus on ETFs instead, they’ll be better for your portfolio… and help you avoid the headache!

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Category: Dividend Bust

About the Author ()

Michael Jennings writes and edits showing how you can profit from dividend stocks. His passion for stocks and especially Dividend Stocks began at an early age. Now he shares his knowledge and wisdom with anyone who asks... He shows beginning investors, retirees, and even trading pros how to create regular income by investing in dividend stocks, easily, step-by-step! You can Sign up for his free Dividend reports and dividend newsletter at

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