As my Fool colleague Selena Maranjian noted in a recent article, investors these days are lovin' dividends. Dividend-paying stocks have grown in popularity in recent years, as investors have backed away from many of the high-flying picks popular in the late 1990s, opting for steadier Eddies. Admired for the cushion against price volatility that a dividend component provides, yield-bearing stocks have also gotten more attractive since the changes to the tax code in mid-2003, when the top tax rate levied on dividends was shaved to 15%.
It's no surprise, then, that a truckload of dividend-focused funds has hit the marketplace in recent years, swamping investors with choices. What's a discriminating but yield-yearning Fool to do?
Fund expenses are taken directly from dividend distributions before those dividends reach your wallet, so we looked to Vanguard, one of the industry's lowest-cost providers, for income-oriented funds that stand out from the crowd. (Vanguard is also a favorite of the Fool's resident fund geek Shannon Zimmerman, whose Champion Funds newsletter service I heartily recommend.)
Vanguard Equity Income was the first fund to catch our eye. The managers here look for stocks with above-average dividends and low valuations. That's led to a portfolio packed with financial names, including Citigroup
For those who like the all-in-one appeal of a hybrid fund, Vanguard Wellington is another attractive choice. The fund invests 60% to 70% of its assets in large- and mid-cap stocks and the remainder in high-quality corporate and government-backed bonds. With cash-rich blue chips such as AltriaGroup
If you're craving dividends but want to shop beyond the standard blue-chip fare, Vanguard Selected Value is a choice off the beaten path. Lead manager Jim Barrow, who has made a name for himself picking winners elsewhere, homes in on cheap picks among mid-sized companies and keeps a trim stable of just 30 to 40 names. While many funds specializing in smaller stocks have higher costs than their large-cap peers, this fund's low 0.60% price tag helps keep the dividend healthy -- 1.4% over the past year.
To be sure, the number to watch with any investment is total return; a tidy dividend might be nice, but if the fund you're considering is an underperforming dud in other respects, its lagging ways can offset (and then some) its yield. So the upshot is this: Don't swing at that fat payout pitch before getting the inside scoop on whether the fund has what it takes to pass the Championship test.
Fool contributor Josie Raney doesn't own any of the stocks mentioned in this article.