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 they work
How dividend mutual funds work
A mutual fund pools investor capital into a single investment vehicle. Depending on the fund's mandate, they invest the money into stocks, bonds, or other assets. As the name implies, a dividend mutual fund invests in a diversified portfolio of dividend-paying stocks. That gives the funds income to pay dividends to their investors. They have the option to use the cash as they see fit, including reinvesting their dividends to buy more shares of the mutual fund.
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.
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 pay.
With these factors in mind, here's a closer look at some of the top dividend mutual funds.
Top Five High-Dividend Mutual Funds
Most mutual funds hold at least some stocks that pay a dividend. Because of that, 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:
Federated Strategic Value Dividend Fund
1. Federated Strategic Value Dividend Fund
The Federated Strategic Value Dividend Fund (NASDAQMUTFUND:SVAA.X) 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 2024, the fund had $8.1 billion of assets under management (AUM) and held 46 stocks. The top five fund holdings were:
- Philip Morris International (PM 2.82%)
- Duke Energy (DUK 2.41%)
- TotalEnergies (TTE 1.72%)
- Verizon (VZ 0.9%)
- LyondellBasell Industries (LYB 1.35%)
The fund focuses on sectors known for paying attractive dividends. The top five included utilities (21.9% of the fund's holdings), financials (15.8%), health care (14%), consumer staples (13.4%), and energy (12.1%).
The mutual fund had a 30-day SEC yield of 4.3%, reflecting the dividends and interest earned after deducting the fund's expenses. That was considerably above the S&P 500's 1.4% dividend yield.
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 gross expense ratio of 0.81%, it's higher than the mutual fund industry's average of 0.6%. The higher cost is the price investors pay for an actively managed fund that aims to deliver higher returns than a market index.
Vanguard High Dividend Yield Index Fund Admiral Shares
2. Vanguard High Dividend Yield Index Fund Admiral Shares
The Vanguard High Dividend Yield Index Fund (NASDAQMUTFUND:VHYA.X) 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 2024, the fund had $63.1 billion of assets and held 449 stocks. The top five fund holdings were:
- JPMorgan Chase (JPM 2.51%)
- Broadcom (AVGO -4.31%)
- ExxonMobil (XOM 1.15%)
- Johnson & Johnson (JNJ 1.49%)
- Home Depot (HD 0.74%)
The fund had a 30-day SEC yield of 3% 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 (21.5% of the fund's holdings), consumer staples (12.2%), healthcare (11.7%), industrials (12.3%), and energy (9.9%).
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 0.84%), with a slightly lower expense ratio (0.06%) and a low minimum investment of one share ($113 as of early 2024).
Vanguard Equity Income Fund Investor Shares
3. Vanguard Equity Income Fund Investor Shares
The Vanguard Equity Income Fund (VEIPX -0.05%) aims to provide investors with above-average current income. It invests in U.S. companies dedicated to consistently paying high dividends. The actively managed mutual fund benchmarks its returns against the FTSE High Dividend Yield index.
As of early 2024, the fund had $54.2 billion of assets and held 182 stocks. The top five fund holdings were:
- JPMorgan Chase (JPM 2.51%)
- Merck & Co. (MRK 0.44%)
- Johnson & Johnson (JNJ 1.49%)
- ConocoPhillips (COP 1.23%)
- Pfizer (PFE 2.4%)
The fund had a 30-day SEC yield of 2.8% and distributed dividends quarterly. The dividend mutual fund also focuses on sectors known for paying attractive dividends. Its top five were financials (20.7% of the fund's holdings), healthcare (15%), consumer staples (13.4%), energy (10.4%), and industrials (10.3%).
The mutual fund has an expense ratio of 0.27% (about half the industry average) and a minimum investment of $3,000. Vanguard also offers a lower-cost version of the fund (Admiral Shares) with an expense ratio of 0.18%. However, it has a much higher minimum investment of $50,000.
T. Rowe Price Dividend Growth
4. T. Rowe Price Dividend Growth
The T. Rowe Price Dividend Growth Fund (PRDGX -0.3%) focuses on stocks with strong records of paying dividends or those that should increase their payouts over time.
As of early 2024, the fund had $23.6 billion of assets and held 105 stocks. The top five fund holdings were:
- Microsoft (MSFT -1.27%)
- Apple (AAPL -1.22%)
- Visa (V -0.59%)
- UnitedHealth Group (UNH 1.61%)
- Accenture (ACN 0.28%)
The dividend mutual fund had a 30-day SEC yield of 1.2% and paid quarterly distributions to investors. The dividend mutual fund focuses on sectors known for paying growing dividends. Its top five were information technology (19.6% of the fund's holdings), healthcare (16.4%), industrials and business services (15.7%), financials (15.5%), and consumer staples (9%).
The mutual fund has an expense ratio of 0.64% (about half the industry average) and a minimum investment of $2,500 for the investor class shares. T. Rowe Price (TROW 0.01%) also offered a Dividend Growth ETF (TDVG 0.22%) with similar holdings at a lower expense ratio (0.5%).
BlackRock Equity Dividend
5. BlackRock Equity Dividend
The Blackrock Equity Dividend Fund (NASDAQMUTFUND:MDDV.X) owns a portfolio of large-cap U.S. value stocks. It strives to invest in companies with a greater potential of increasing their dividends. It also aims to deliver lower-volatility returns.
As of early 2024, the fund had $18.6 billion of assets and held 93 stocks. The top five fund holdings were:
- Wells Fargo (WFC 2.74%)
- Citigroup (C 1.41%)
- Shell (SHEL 1.46%)
- American International Group (AIG 1.7%)
- Kraft Heinz (KHC 1.8%)
The fund had a 30-day SEC yield of 1.7% and paid quarterly distributions to investors. The dividend mutual fund also focuses on sectors known for paying growing dividends. Its top five were financials (24.5% of the fund's holdings), healthcare (18%), industrials (11.1%), consumer staples (8.6%), and energy (7.8%).
The mutual fund has an expense ratio of 0.93% (about half the industry average) and a minimum investment of $1,000.
Related investing topics
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 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.
Dividend mutual fund FAQ
What is the best mutual fund for dividends?
There are lots of good mutual funds for dividends. Some funds focus on higher-yielding dividend stocks, while others concentrate on companies that can grow their dividends. Because of that, the best dividend mutual fund for a retiree (higher-yielding dividend stocks) might not be the best one for a younger investor (dividend growth stocks).
However, according to Morningstar, the best dividend mutual fund in early 2024 was the BlackRock Equity Dividend Fund.
Are dividend mutual funds a good idea?
Dividend mutual funds can be a good idea. They enable investors to own a diversified portfolio of dividend-paying stocks to generate income and capitalize on stock price appreciation. Historically, dividend stocks have delivered higher returns than the average stock in the S&P 500. That data suggests that a dividend-focused mutual fund can be a good investment.
Which mutual fund is best for monthly dividends?
Many of the top dividend mutual funds make quarterly distributions to investors. However, the Federated Strategic Value Dividend Fund pays investors monthly. That makes it one of the best mutual funds for seeking monthly dividends.
Which fund has the highest dividend?
Mutual fund dividend yields can fluctuate from month to month based on the fund's price and the dividend income generated by its current holdings.
As of early 2024, the JPMorgan Equity Premium Income Fund (NASDAQMUTFUND: JEPAX) had one of the highest dividend yields among dividend-focused mutual funds at 7.4%. The fund owns dividend-paying stocks and generates additional income by writing call options on the S&P 500.
