Why to Invest in Dividend Paying Mutual Funds

Why to Invest in Dividend Paying Mutual Funds

Though riskier in character than other fund categories, these funds have the ability to deliver appreciably higher returns due to two primary reasons. Firstly, they generate high ... Below we will share with you 5 top rated small-cap mutual funds. Each ... Top 5 Zacks#1 Ranked Small-Cap Mutual Funds - Best of Funds

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Investors love dividend-paying stocks because of the reliability of their cash flows & stable businesses that will exist well in to the future. Utility companies, industrial conglomerates & oil & gas companies fall in to this category. However the run up in technology stocks in the late 1990s brought negative effects on dividend paying stocks because investors turned away from them in search of higher growth technology companies. In fact during the market top in March 2000, the average dividend yield of all companies in the S&P 500 Index fell to just 1.1%. This was versus a historic average dividend yield of 3%. Since then, tech stocks have tumbled & dividend paying stocks have become favorable again. In this article, we will go over why now is a good time to invest in dividend paying mutual funds.

Dividend Paying Mutual Funds

Obviously, investing in dividend paying stocks helps to grow your portfolio by re-investing the dividends & letting the power of compounding growth work in your favor.

By re-investing dividends, you are accumulating more shares of your investment, thus slowly increasing your net worth. Purchasing dividend paying mutual funds eliminates the need to identify a handful of dividend paying stocks & provides instant diversification across a whole basket of stocks. Usually, dividend paying mutual funds have 100s or more basket of stocks spread across various sectors such as Energy & Gas, Banking, Real Estate Investment Trusts (REIT), Telecommunications, Utilities, etc. Therefore if one sector of the market gets hit e.g. the Financials or Banks, then your other sectors will not be affected as much, thus lowering your downside risk. Also, re-investing your dividends is done automatically & no additional expenses are incurred.

Advantages of Dividends

Dividends are a way of rewarding shareholders who hold on to a company's stock. The best measure of a company's performance is cash flows & the company that can make stable dividend payments over many years & be able to pay all operating & capital expenses is the best investment you can make. Here are some more advantages of dividend paying mutual funds:

* Dividends add up over time - In fact over the last 25 years, the S&P 500 Index has gained 914%. If you add re-invested dividends, it soars to 2000%

* Dividends are tax-efficient - Interest gained from a Guaranteed Investment Certificate (GIC) at your local bank is taxed at your income tax bracket, which can be as high as 35%. Qualified dividends however are taxed at lower long term capital gains rates, which is 15% for most investors.

* Dividends grow overtime unlike GICs - Most companies that pay dividends are committed to growing their payouts over time as business improves, cash flow efficiency increases & to retain shareholder interest in their stock. As an example, consider McDonalds Corporation (NYSE: MCD). In the last 10 years, McDonald's shares have risen by 192.50% and the company has increased its annual dividend from 22.5 cents a share to a whopping $ 2.32 per share. This represents a tenfold increase in dividend along with the 193% capital growth. Whereas if you purchase US treasuries, you might get 3.2% interest for a 10 year bond with no growth in the interest rate i.e. the 3.2% interest will never increase because it is fixed. Recommend Why to Invest in Dividend Paying Mutual Funds Topics