High Dividend Funds – A Great High Yielding Investment

Here is a selection of high dividend funds that make great medium to long term investments.

There are traditionally two main choices when choosing a dividend fund – a stocks based mutual fund or a bonds based mutual fund. Alternatively it’s possible to invest directly in bonds or stocks rather than through a mutual fund. A more recent option is to invest in Exchange Traded Funds (ETF’s), and a number of high dividend paying ETFs are now available.

Equity Income Funds

Equity income funds are the traditional source of high dividend income. There are a number of mutual funds that have an equity income based theme. They normally invest in a basket of high yielding equities, which are normally larger companies.

Mutual funds often have an initial charge to buy them, but this fee is often refunded by a discount broker. It’s worth shopping around to get the best deal. It’s almost always better value to buy a mutual fund through a discount broker or online fund supermarket rather than buy a mutual fund from your bank or from the mutual fund manager itself.

There are a large number of standard equity income funds to choose from. The funds tend to differ by which stocks they invest in. Many funds tend to invest in large companies only, while other funds focus on some of the smaller and medium sized companies that pay out regular dividends.

US and Asian based companies tend to pay low dividends, so many equity income mutual funds look to companies in the UK and Europe for a source of high dividends. These companies often pay good dividends, although for US or Asian investors there is the possibility of foreign currency changes eroding returns.

As well as standard equity income funds, there are a few funds that use covered calls to boost the high dividends that they pay out, and they aim to beat the returns from traditional equity income funds. Popular funds in this category include the Schroeder Income Maximiser fund. The Premier Optimum Income fund is far less well known, but it has been returning very high levels of dividends during 2009 and 2010.

Corporate bond funds have traditionally been a good source of high yields from investment capital. Holding corporate bonds is also considered to be less risky than investing in equities. Funds like the Vanguard Long-Term Investment-Grade Fund Investor Shares are available as mutual funds that can allow an investor to invest in a range of corporate bonds.

It’s worth checking to see what a bond fund invests in as bonds from smaller companies or those with less creditworthy credit ratings are generally riskier investments. However, a higher risk bond will tend to pay a higher level of interest.

Fidelity Dividend Funds

Fidelity are a particularly well known mutual fund provider. The Fidelity Dividend Growth Fund is a particularly popular high yield mutual fund. The fund invests mostly in equities, although there is a modest bond holding. The fund invests mainly in US based companies, with small holdings of overseas stocks. The fund has more than 500 holdings which is quite unusual for an equity income fund, which normally invest in far fewer stocks.

Mutual funds often have initial fees as well as charging an annual management fee. It can sometimes therefore be cheaper in the long term to invest in individual stocks.

A number of stocks are available that pay high dividends. When looking for long term investment income it’s usual for an investor to look for stocks who have a stable business and are able to sustain the level of dividend payments over the medium to long term. Although some smaller companies pay dividends, investing in smaller companies is generally more risky.

Some industry sectors have more high dividend stocks than others. Sectors that are popular with high dividend seeking investors include utilities (such as water companies), energy (major oil companies) and pharmaceuticals (especially the larger multinationals).

Before the 2008 financial crash many banks and financial stocks were high dividend payers, but most have now scaled back the level of payments as they rebuild their capital rather than pay it out to their investors.

Exchange Traded Funds (ETFs) are an alternative to high dividend funds or stocks. An ETF is traded on a stock exchange just like a stock. However an ETF normally contains several underlying holdings like a mutual fund. The advantage of ETFs is that they can be traded like stocks, so you can get a quote for the price when you want to buy or sell the ETF. By contrast mutual funds don’t generally give live prices so if you want to buy or sell them you have to wait for several days while the transaction is processed. At the end you have no guarantee of what price you’ll get for the mutual fund.

There are a huge number of ETFs available. For investors wanting to invest in high dividend ETFs the options are normally corporate bond ETFs or those based on high yielding stocks.

Many ETFs pay a quarterly dividend. Unlike many mutual funds, ETFs pay their dividends as cash rather than allow the option of buying accumulation units that entitle you to more units in a mutual fund instead of a cash payout.

The most popular high dividend yielding ETFs are those that invest in corporate bonds. The iShares Corporate Bond ETF (stock ticker SLXX on the London Stock Exchange) is particularly popular. It invests in a basket of corporate bonds from the UK’s largest companies). Similar iShares ETFs are available for the Euro zone and USA.

For US based investors, the iShares iBoxx $ High Yield Corporate Bond Fund (stock ticker HYG) is a popular choice of corporate bond ETF. It pays out a monthly dividend.

Looking for other high dividend investments? Here’s more information about corporate bond ETFs, income generating unit trusts and fixed income investments.

The author of this article is not authorised to give financial advice. This article is for information only does not constitute financial advice. Before making investment or retirement decisions consult an independent financial adviser.