Consider Dividend-Paying Funds as a Source of Income

Posted by dfederman on Aug 24, 2011 in Investor Education | Comments Off

Key Points

Profitable companies traditionally have rewarded their shareholders one of two ways: by reinvesting corporate profits in the company with the long-term goal of increasing the stock price or by paying shareholders a regular dividend. While the stock price may or may not increase over the long term, dividends, typically paid quarterly, offer investors more immediate income. Many large, well-established companies historically have paid dividends.

Mutual funds that invest in dividend-paying stocks may enhance your portfolio in the following ways:

  • A source of supplemental income. For investors with an appropriate risk tolerance, funds that pass along equity dividends offer another choice for potential income.
  • A track record of strong returns. Past performance is no guarantee of future returns, but history shows that dividend-paying stocks have the potential to generate average annual returns that are higher than those generated by non-dividend payers.
  • A potential cushion against market volatility. The prices of dividend-paying stocks historically may experience fewer ups and downs compared with equities that have not paid dividends. Dividends provide a regular return even when stock prices are in a slump.

Ask your investment advisor whether a dividend-producing fund provided by the is appropriate for your circumstances. As its name implies, an equity income fund may enable your portfolio to benefit from the best of both worlds: The long-term growth potential of stocks combined with a source of income.

Keep in mind, however, that a company’s track record of paying dividends in the past does not necessarily mean the company will remain profitable or continue to pay dividends in the future.

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© 2011 McGraw-Hill Financial Communications. All rights reserved.

August 2011 — This column is provided through the Financial Planning Association, the membership organization for the financial planning community, and is brought to you by Dan Federman, CFP®, a local member of FPA.

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