Find out if dividend mutual funds are right for you, and which Fidelity funds best fit your income goals.
Why Invest in Dividend Mutual Funds
When you invest in a standard mutual fund, your money is added to a larger pool of money from all of the fund’s investors. This sum is then used to purchase stocks, bonds, or other assets. All of these holdings make up a single portfolio that is managed by those experts who know the market. Letting a professional manage your funds can take the pressure and work off of you. This is one of the main reasons people invest in mutual funds. A diverse portfolio of holdings is also a safe and steady way to grow money in the long term, but you won’t always see these profits on a regular basis, or in cash form. If you’re interested in both long-term growth and more income at recurring intervals, dividend funds might be right for you.
How Do Dividend Funds Work?
A dividend fund is a type of mutual fund that invests solely in stock equity. Most often, high-quality and publicly traded stock from large companies. In investing terms, these are known as “large-cap” or “big-cap” stocks. This means they are widely purchased and valued at over $10 billion in the market. These companies have been around for a while, so they tend to be consistent, and they tend to treat their shareholders well by making payouts each quarter. When you invest in dividend funds, you’re buying shares of profits from a group of companies that perform well over time. Though payouts may vary slightly, you can expect that each quarter you’ll receive a share of the pool of dividends as a cash payout. You then have the option to keep the cash or invest it back into the fund (which helps build long-term growth). Most funds will default to the reinvest option, so in order to receive income, you have to opt in by checking a box or signing a contract to elect to receive the payments.
Whom Are Dividend Funds For?
Since dividend mutual funds are a mostly safe and passive way to grow income, they are a popular choice for retired investors. Investors who are looking for long-term growth can choose not to take the cash payout and instead use their share of dividends to reinvest and buy more shares of the fund. Dividend mutual funds are also good options if you’re just starting to invest, as you don’t need to know a lot about the market. For people who are learning, the risk of losing your money is low, but you’ll still have some control over your cash flow because you get to make choices and see results.
3 Best Fidelity Funds for Dividends
When picking the best Fidelity funds for dividends, savvy investors know to look at the fund’s 30-day SEC Yield. This is also called the “30-day yield” or “SEC yield.” This figure will tell you how much a fund earned during the last calendar month, minus expenses. It doesn’t translate directly to how much you’ll see as a payout, since each fund works differently, but it offers a small look at total returns. The SEC yield is measured against other stocks or mutual funds, so a fund with a high yield is above average when compared to other funds of its kind during the last term, and it is likely to pay out more. A fund’s success can also be measured by its annual return, or how much its value has grown over a full year. The annual return is a good way to gauge how stable a company is over time, which can help you decide how to invest, but it doesn’t quite capture details of short-term profits or losses, or dividend payouts. Steady cash payouts are not always part of what makes up a company’s full annual return. To find the best Fidelity funds for dividends, we narrowed our search to those they call “income oriented,” which pay above-average dividends. We then chose the three with the highest yields. Here are the best Fidelity funds that pay above-average dividends:
Fidelity Equity Dividend Income Fund
Fidelity Equity Dividend Income Fund (FEQTX) performs at an average rate with regard to annual returns, but it has among the highest yields of all of Fidelity’s stock funds. The fund holds mainly large-cap value stocks in U.S. companies on the S&P 500 index, paying above-average yields. Top holdings include Chevron Corp (CVX), Wells Fargo (WFC), and Johnson & Johnson (JNJ). The 30-day yield for FEQTX is 2.95%, and the expense ratio is low at 0.60%. There is no minimum investment to get started with this fund.
Fidelity Growth and Income Portfolio
Fidelity Growth and Income Portfolio (FGRIX) doesn’t often lead the averages in performance but does well at producing dividend income for investors. This fund’s holdings are divided between domestic and foreign stock, with a portfolio allocation of about 90% U.S. stocks and 10% foreign stocks. The focus here is on large-caps, with top holdings like General Electric (GE), Microsoft (MSFT), and Exxon Mobil (XOM). The 30-day yield for FGRIX is 2.03%, and the expense ratio is relatively low at 0.61%. There is no minimum investment to get started with this fund.
Fidelity Equity Income Fund
Fidelity Equity Income (FEQIX) is consistently among the best Fidelity funds for dividends. It consists of large-cap value stocks with the highest concentration in financials and health care sectors. Top holdings include JP Morgan Chase (JPM), Berkshire Hathaway (BRK/B), and Johnson & Johnson (JNJ). The 30-day yield for FEQIX is 1.93% and the expense ratio is at 0.61%. There is no minimum investment to get started with this fund.
The Bottom Line
Dividend funds from Fidelity can be wise choices for investors looking for an income stream, or a mix of growth and income. Investors should keep in mind that, although dividend mutual funds may pay good or above-average yields, they are not failsafe. As with all securities, there is always a risk of losing money. In addition to dividend-paying stock funds, Fidelity has a strong selection of high-yield bond funds. High-yield bond funds also produce income but are less risky in that they consist of safer bonds as opposed to stocks. As always, investors should keep in mind their own tolerance for risk and their investment goals. The Balance does not provide tax, investment, or financial services or advice. The information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk, including the possible loss of principal.
