If you're looking for income from your investments, an income-oriented mutual fund may sound like a perfect choice. Unfortunately, many such funds are far from your best bet.
On average, funds that focus on offering you income have not been offering you very much of it. Check out these numbers:
|Average stock fund||2.3%|
|Growth and income funds||2%|
|S&P 500 Index funds||2%|
|Average 5-Year CD||2.1%|
Data: Morningstar, Bankrate.com. Stock and fund figures are for trailing 12 months.
Seek the best
Surprisingly, you can get pretty much the same yield from most of these options. On average, the income-oriented fund isn't offering you any particular advantage. Still, that average includes a broad range of yields. Some growth and income funds pay less than 1% in dividends, while ETFs designed for high yields pay 4% or more.
Don't simply trust the word "income" in a fund's name. Look up its actual yield, and then keep an eye on its results over time, since funds can sometimes drift into different holdings and strategies. If income is of great interest to you, but isn't paramount, make sure to examine a fund's other qualities as well. Funds with disappointing-looking yields may compensate with robust capital appreciation.
Do it yourself
Alternatively, you can just assemble your own basket of healthy, growing dividend payers. These days, it's not too hard to find attractive companies with appealing yields.
Both General Electric
General Electric offers instant diversification across scores of business lines, including promising new areas such as alternative energy. The conglomerate has been growing its workforce recently, and buying new businesses such as oil-and-gas equipment maker Dresser.
When its blockbuster Lipitor loses patent protection, drugmaker Pfizer aims to offset the lost income by tapping its promising pipeline. It's also expanding into generic drugs, a business that's proved very profitable for rival Teva Pharmaceutical.
You can build wealth with dividend income. Just be sure you know what your investments are actually delivering.
We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
Longtime Fool contributor Selena Maranjian owns shares of General Electric and National Grid. Pfizer and Sysco are Motley Fool Inside Value choices. National Grid and Sysco are Motley Fool Income Investor recommendations. The Fool owns shares of Sysco and Teva Pharmaceutical. Try any of our investing newsletter services free for 30 days. The Motley Fool is Fools writing for Fools.