Choosing Your Funds Wisely
Why should you consider dividend funds amid uncertain markets?
Key Takeaways
● If you are looking for a potential income stream for your retirement or in this volatile market, you may consider dividend investing.
● Dividend funds could diversify your exposure to one company's dividend cuts or suspensions.
What is dividend investing?
Dividend investing is investing in stocks and funds that pay regular dividends.
For investors, their investment returns generally come from:
1. Capital gains;
2. Dividends — Distributed by a company in the form of cash or additional shares. (However, high dividends may not imply a total positive return as dividends may be paid out from the capital instead of profit, causing the share price to drop.)
Why is dividend investing attractive?
If you want a potential income stream for retirement or in this volatile market, you may consider dividend investing.
1. A potential passive income stream
Dividend investing's primary purpose is to create a passive and relatively steady income stream to potentially hedge against market uncertainty and volatility.
2. Risk management
According to datastream, high dividend payers measured with S&P 500 Dividend Aristocrats index outperformed the S&P 500 amid bear markets between 1996 to 2016.
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Source: Datastream, 8.3.2017. Past performance is not indicative of future performance.
Also, dividend payers are usually more profitable and less volatile than companies that rarely pay dividends in the long term, according to Ned Davis Research and Hartford Funds.
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Types of dividend mutual funds
If you like dividend investing and would like professional fund managers managed your investments for you. Examples of dividend funds are:
Generally, dividend funds hold stocks and/or bonds with dividends or interest payout, including some equity funds, bond funds, and hybrid funds.
1. Dividend equity funds
Dividend equity funds hold a basket of dividend-bearing stocks that aims to payout dividends to the investors. Dividend equity fund help to diversify the risk of a single company’s dividend cut or suspension, which will lower the return of the fund.
2. Dividend bond funds
Dividend bond funds hold a basket of interest-bearing bonds that will generate interest for the investor. Similarly, having a basket of interest-bearing bonds helped to diversify the risk of a single bond default which will lower the return of the fund.
3. Hybrid dividend funds
Hybrid dividend funds are a mixed basket of dividend-bearing stocks and interest-bearing bonds that will generate interest and dividends for the investor.