Dividend stocks often make excellent investments. Companies that pay dividends have historically outperformed the S&P 500 with significantly less volatility. That's because the dividend income is a meaningful contributor to a stock's total return (share price appreciation plus dividends).
However, with so many companies making dividend payments, it can be challenging to pick the best dividend stocks. That's where dividend mutual funds can help. They allow investors to own a diversified portfolio of stocks that generate dividend income.
Here's a closer look at how dividend mutual funds work and some of the top dividend mutual funds to consider.
How dividend mutual funds work
A mutual fund pools investor capital into a single investment vehicle. Here are a few notable characteristics of the way dividend mutual funds work:
- Investment mandate: Mutual funds invest the pooled capital they receive into stocks, bonds, or other assets based on their stated mandate. For example, as the name implies, a dividend mutual fund invests in a diversified portfolio of dividend-paying stocks. That gives the fund income to pay dividends to its investors, who have the option to use the cash as they see fit, including reinvesting their dividends to buy more shares of the mutual fund.
- Fund types: There are two types of dividend mutual funds -- passively or actively managed. Passively managed dividend mutual funds are index funds that aim to track a particular dividend-related index. Meanwhile, actively managed dividend mutual funds buy and sell the top dividend stocks, striving to outperform a specific index.
- Expense ratio: Whether active or passive, mutual funds charge their investors a management fee known as the expense ratio. Passively managed mutual funds usually have a lower expense ratio than actively managed funds. As a result, these mutual funds pay a higher percentage of the dividend income they receive to their investors than actively managed funds do.
With these factors in mind, here's a closer look at some of the top dividend mutual funds.
Top five dividend mutual funds
Most mutual funds hold at least some stocks that pay a dividend, so they collect some dividend income that must be distributed to investors on a proportional basis at least once each year.
However, some mutual funds specifically focus on owning stocks that pay dividends, especially those with a high dividend yield. Funds geared toward this strategy usually make more frequent distributions, typically quarterly or, in some cases, monthly. We'll focus our dividend mutual fund search on those offering above-average yields or targeting companies known for delivering dividend growth.
Five standout dividend yield-focused mutual funds are:
1. Federated Hermes Strategic Value Dividend Fund
NASDAQMUTFUND: SVAAX
Key Data Points
The Federated Hermes Strategic Value Dividend Fund (SVAA.X +0.15%) aims to generate income and long-term capital appreciation. It invests in stocks with higher dividend yields than a broad equity market index and with dividend growth potential. This actively managed mutual fund benchmarks its performance against the S&P 500 and the Dow Jones U.S. Select Dividend index.
As of early 2026, the fund had $9.2 billion of assets under management (AUM) and held about 45 stocks. The top five fund holdings were:
- U.S. Bancorp (USB +2.32%)
- TotalEnergies (TTE +3.53%)
- PNC Financial (PNC +2.76%)
- British American Tobacco (BTI +1.42%)
- Prologis (PLD +1.70%)
The fund focuses on sectors known for paying attractive dividends. Its portfolio holdings by sector included healthcare (18.5% of its assets), utilities (17.9%), energy (16.2%), financials (15.7%), and consumer staples (13.8%).
The mutual fund had a weighted average dividend yield of 3.3%. That was considerably above the S&P 500's 1.1% dividend yield, which was around its lowest level in more than 20 years in early 2026.
This dividend mutual fund generally has a minimum investment of $1,500. The relatively low minimum investment makes it easy for investors to start collecting passive income because it distributes dividends monthly.
The one mark against the fund is its expense ratio. With a net expense ratio of 1.06%, it's much higher than the mutual fund industry's average of 0.42%. The higher cost is the price investors pay for an actively managed fund that aims to deliver higher returns than a market index.
2. Vanguard High Dividend Yield Index Fund Admiral Shares
NASDAQMUTFUND: VHYAX
Key Data Points
The Vanguard High Dividend Yield Index Fund (VHYA.X +0.71%) provides broad exposure to U.S. companies that have consistently paid above-average dividends. It emphasizes slower-growing, higher-yielding companies.
This passively managed mutual fund benchmarks its returns against the FTSE High Dividend Yield index. The index tracks stocks of U.S. companies that have paid above-average dividends for the past 12 months, excluding real estate investment trusts (REITs).
As of early 2026, the fund had $84.6 billion of net assets and held around 560 stocks. The top five fund holdings were:
- Broadcom (AVGO -3.26%)
- JPMorgan Chase (JPM +2.26%)
- ExxonMobil (XOM +3.98%)
- Johnson & Johnson (JNJ +1.02%)
- Walmart (NYSE:WMT)
The fund had a 30-day SEC yield of 2.4% (more than double the S&P 500's yield at the time) and distributed dividends quarterly. Like the FTSE High Dividend Yield index, the fund weights heavily toward industries known for paying attractive dividends. Its top five sectors were financials (21.9% of the fund's holdings), technology (13.4%), industrials (13.2%), healthcare (12.9%), and consumer discretionary (9.8%).
The mutual fund has an expense ratio of 0.08%, well below the mutual fund industry's average expense ratio. The fund also has a minimum investment of $3,000. It's worth pointing out that Vanguard offers a similar exchange-traded fund (ETF), Vanguard High Dividend ETF (VYM +0.60%), with a slightly lower expense ratio (0.06%) and a low minimum investment of one share (around $150 as of early 2026).
3. Vanguard Equity Income Fund Investor Shares
4. T. Rowe Price Dividend Growth
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Top-notch dividend mutual funds
Investors seeking to earn some passive income can use dividend mutual funds to achieve that goal. The strategy allows investors to own a diversified portfolio of higher-yielding, dividend-paying stocks, which should help lower their risk. Although there are many dividend mutual funds out there, the Federated Hermes Strategic Value Dividend Fund, Vanguard High Dividend Yield Index Fund, Vanguard Equity Income Fund, BlackRock Equity Dividend Fund, and T. Rowe Price Dividend Growth Fund stand out as the top options for people seeking an attractive income stream.
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About the Author
Bank of America is an advertising partner of Motley Fool Money. JPMorgan Chase is an advertising partner of Motley Fool Money. Wells Fargo is an advertising partner of Motley Fool Money. Citigroup is an advertising partner of Motley Fool Money. Matt DiLallo has positions in Amazon, Apple, Broadcom, JPMorgan Chase, Johnson & Johnson, and Visa and has the following options: short November 2025 $260 calls on Apple. The Motley Fool has positions in and recommends Amazon, Amgen, Apple, JPMorgan Chase, Microsoft, U.S. Bancorp, Vanguard Whitehall Funds - Vanguard High Dividend Yield ETF, Visa, and Walmart. The Motley Fool recommends Broadcom, CVS Health, Johnson & Johnson, SS&C Technologies, and UnitedHealth Group and recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
