If you read much financial news, you've likely seen at least one feature on the popularity and strategic value of dividend mutual funds. The reason for this attention on dividend-paying mutual funds is because there are very few attractive investments out there that provide good income in today's challenging economic environment.
The Challenge to Find Income in Today's Environment
Mutual fund investors looking for income are essentially looking for a dependable stream of interest payments from their investments. In simple terms, they are looking for a paycheck, if you will, from their investments. These investors, commonly retired individuals, usually use a combination of bond mutual funds (also called "fixed income funds") and dividend-paying stock mutual funds.
The problem and challenge for income investors is that bonds are simply not paying much these days. The yield (interest or dividends received), for example, on 10-year Treasury Bonds is almost zero. To add insult to injury, one of the most famous bond mutual fund managers in the world, Bill Gross, has said that he likes dividend-paying stocks more than bonds right now.
Should You Use Dividend Mutual Funds?
Whether or not dividend mutual funds are right for you depends upon your investment goals. If you are seeking income, you may benefit by adding some dividend exposure to your overall portfolio. An easy way to get exposure to dividend-paying stocks is with an Exchange Traded Fund (ETF), such as the SPDR S&P Dividend fund (SDY) or a mutual fund, such as T. Rowe Price Dividend Growth (PRDGX).
Your humble author, however, will say that funds specializing in dividends are not necessary or appropriate for most investors, primarily because focused areas of investing are typically short-term trends and this type of market timing can be harmful. Most broadly-invested Index Funds will have exposure to both income (dividend-paying stocks) and growth stocks. So adding more exposure to dividend-paying stocks is not generally an advantage.
In the end, diversification wins.