Fund Investing in Dividend Heavy Stocks

by Tim Plaehn

Dividend stocks provide investors with a steady income stream plus the opportunity for capital appreciation if share prices increase. Investing in a mutual fund focused on dividend stocks provides the same advantages plus the ability to buy a diversified portfolio of stocks with a single investment. Some basic research tools will help you find and analyze dividend stock funds.

Dividend Stocks

Dividend stocks are shares of companies paying out a portion of the company profits to shareholders in the form of dividends. Dividend-focused investing will look for stocks where the dividend rate pays a relatively high yield. If the average dividend rate for the overall stock market is 2 percent, dividend stock investor may look for stocks yielding 4 percent or more. Another approach to dividend investing is to look for companies with a history of steadily increasing the dividend payout. These stocks can provide long term growth of income and share values.

Fund Categories

The broad category of mutual funds that invest in dividend paying stocks is growth and income funds. Growth and income funds are stock funds with an investment goal of a balance of stock price appreciation and income from dividends. Funds focused on higher yield stocks fall under the income stock fund or equity income fund categories. Mutual funds with these category phrases -- growth and income, income stock or equity income -- in their names are a good starting point for your research into high dividend stock funds.

Researching Funds

From your list of dividend oriented funds, locate each fund's online information and start by reading the fund's investment objective. The objectives will tell you if the fund is focused on high yield or dividend growth stocks. Next review the fund's history of dividend distributions. Divide the total of the four most recent quarterly dividends into the current share price to calculate the fund's dividend yield. The listing of historic dividends will show if the fund has been able to increase the dividend amount over time.

Benefits of Income Funds

Investing in a growth and income or equity income mutual fund takes advantage of the benefit offered by mutual funds to select automatic reinvestment of dividends. Compound dividend growth will enhance the total return of a fund and smooth out the ups and downs of the stock market. As an investor, your should base your fund selection on how the fund selects dividend stocks and the fund's investment goals, rather than looking at past performance.

About the Author

Tim Plaehn has been writing financial, investment and trading articles and blogs since 2007. His work has appeared online at Seeking Alpha, and various other websites. Plaehn has a bachelor's degree in mathematics from the U.S. Air Force Academy.

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