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What Are Dividend Mutual Funds?

The Pros and Cons of Using Dividend Mutual Funds

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Definition:

Dividend mutual funds are stock mutual funds that primarily invest in companies that pay dividends, which are profits that companies share with stock shareholders.

The Pros and Cons of Using Dividend Mutual Funds:

Dividends can be received as a source of income or they can be used to buy more shares of the mutual fund. Most investors who buy dividend mutual funds are usually looking for a source of income, which is to say that the investor would like steady and reliable payments from their mutual fund investment.

In most cases, because of their income-generating nature, dividend mutual funds are best-suited for retired investors. Dividend mutual funds also tend to be less aggressive (less risky) than other types of funds, such as growth stock mutual funds.

Some investors also like to use mutual funds that pay dividends in economic environments where bond mutual funds are not attractive.

Tips For Using Dividend Mutual Funds

Investors should be cautious of using dividend mutual funds because dividends are taxed as ordinary income. For this reason, some investors may consider buying dividend mutual funds in an Individual Retirement Account (IRA) or 401(k), where earnings grow tax-deferred until withdrawals begin. Therefore mutual fund investors should be aware of the taxation of mutual funds before investing.

An easy way to invest in dividend-paying stocks with mutual funds is to use Index Funds or Exchange Traded Funds (ETFs).

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