Best Dividend Mutual Funds

Most investors know that purchasing shares of a mutual fund can help provide them with a level of stability and diversification in their portfolio. What you might not know is that you can also use mutual fund investing to save more money toward retirement and supplement your income through dividend payments. Though all mutual funds pay dividends, some options have higher return rates than others. 

Quick Look at the Best Dividend Mutual Funds

  • Vanguard High Dividend Yield Index Admiral Shares
  • Columbia Dividend Opportunity Fund
  • The Vanguard Dividend Appreciation Index
  • T. Rowe Price Dividend Growth Fund
  • The Federated Hermes Strategic Value Dividend Fund

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Best Dividend Mutual Funds

The right mutual fund investments can help complement your personal financial and investing goals. Explore a few of the best dividend mutual funds using the guide below. 

1. Vanguard High Dividend Yield Index Admiral Shares

Vanguard is known for loading its mutual funds with lower-than-average expense ratios, allowing you to keep a larger percentage of your dividends. The Vanguard High Dividend Yield Index Fund is a mutual fund that attempts to mimic the performance of the FTSE High Dividend Yield Index. This index is made up of companies that pay higher dividends and that have a history of doing so. Some of the fund’s largest investment holdings are in JP Morgan Chase & Co. (NYSE: JPM), Johnson & Johnson (NYSE: JNJ) and Home Depot Inc. (NYSE: HD). 

2. Columbia Dividend Opportunity Fund

The managers of the Columbia Dividend Opportunity Fund focus on investing in equities of large value stocks to maximize dividend returns. The fund’s primary goal is to produce consistent, current income by investing in companies that pay out higher dividends, which are then distributed to shareholders. Some of the Columbia Dividend Opportunity Fund’s largest holdings are in the financial services and healthcare sector. Individual companies that make up the top percentage of the fund include holdings in Johnson and Johnson, JP Morgan Chase and Chevron Corp. (NYSE: CVX). 

3. The Vanguard Dividend Appreciation Index

Another offering from Vanguard, the Vanguard Dividend Appreciation Index is an index fund that attempts to replicate the performance of the NASDAQ US Dividend Achievers Select Index. This index includes companies that have been increasing dividend payouts over time. Some of the largest holdings in this fund include investments in Microsoft Corp. (NASDAQ: MSFT), JP Morgan and Johnson & Johnson.

4. T. Rowe Price Dividend Growth Fund

The T. Rowe Price Dividend Growth Fund is another mutual fund that focuses on companies that have a history of increasing dividend payouts over time. Fund managers believe that increasing dividends indicate that a company is on more stable financial footing, which is the primary basis for inclusion in the fund. The majority of investments in the fund are in common stock of large-cap companies that fund managers believe will continue to raise dividend payments over time. 

5. The Federated Hermes Strategic Value Dividend Fund

The Federated Hermes Strategic Value Dividend Fund can be a strong choice for your portfolio if you’re looking for dividend payments that are offered on a more frequent basis. Unlike the other options on this list, the Federated Hermes Strategic Value Dividend Fund offers monthly dividend payments in lieu of standard quarterly payments. If you’re approaching retirement and looking for consistency in your income supplement, be sure to consider this fund. 

What is a Dividend Mutual Fund?

A mutual fund is a collection of investments that you invest into alongside other investors. You can think of a mutual fund as a type of bundle of stocks and other securities held together. When you buy into the fund, you own a proportional share of each asset that makes up the fund. The company that issues and manages the fund holds assets and keeps track of what you own and are owed.

Over time, the stocks in your mutual fund may produce dividends, which are paid to the mutual fund. The managers of the mutual fund distribute dividends regularly based on the number of shares that you own. The mutual fund may hold accumulated dividends and reinvest them over time, paying out only a few times a year. 

Do all Mutual Funds pay Dividends?

Most companies that pay dividends do so on a quarterly schedule. Managers of dividend mutual funds seek to identify investment opportunities that are likely to return consistent, predictable dividends. Every service that allows you to invest in a mutual fund is legally required to distribute dividends accumulated by the fund’s investments at least one time a year. This means that all mutual funds must pay out a dividend to all their shareholders if dividends begin to accumulate in the fund. However, not every mutual fund manager specifically builds funds based on dividend-producing assets, so the returns you see will vary by investment. 

How do Dividend Mutual Funds Impact Your Portfolio?

Understanding how dividend mutual funds impact your portfolio as an investor can help you decide which percentage of your investment allocations should go to these securities. The following are some of the largest ways that investments in dividend-paying mutual funds impact your overall portfolio.

  • Provides you with income: The most obvious way that dividend mutual funds impact your portfolio is by providing you with a relatively predictable and consistent stream of income. Though all mutual funds are legally required to pay out a portion of their accumulated dividends at least once a year, focusing on mutual funds that offer higher dividend yields can potentially help you increase the return that you see in your portfolio over time. If you’re exploring dividend mutual funds because you’re interested in supplementing your current income, you can select mutual funds that pay out dividends on a quarterly and monthly basis if you choose.
  • Can protect your assets better during a bear market: While many mutual funds focus on searching for stocks with share prices that are increasing in value (sometimes referred to as “growth stocks,”) dividend mutual funds look at long-standing companies with consistent dividends. When the market makes a turn for the worse, these established companies are more likely to retain their value when compared to more volatile security options. This factor can make investing in dividend mutual funds beneficial if you’re approaching retirement or you’re looking for investment opportunities with less risk.
  • Taxed as normal income: A major drawback of dividend mutual funds is that the money you receive through ordinary income is classified as regular income by the IRS. This means that you’ll need to pay taxes on the income you see through your dividend mutual fund investments in the same way that you pay taxes on any money you earn in your salary. However, while your wages likely represent your income after taxes, your broker will not deduct what you owe in taxes when you’re paid a dividend. This means that you’ll need to individually keep track of what you’re earning in dividends to be sure that you can cover what you owe during tax season.

Looking for a way to invest in dividend mutual funds without overspending in taxes? Consider investing in these funds through a Roth retirement account if possible. Roth retirement accounts allow you to save money long term without being taxed on the returns you see on your investments when you reach retirement. Though you aren’t able to deduct contributions to a Roth IRA or Roth 401(k) from your taxes the year you make them, younger investors will likely see more of a return over time using these accounts as their income grows over time. 

Compare Online Brokers

Before you can begin investing in any type of mutual fund, you’ll need to open a brokerage account. Benzinga offers insights and reviews on the following brokerage firms and account providers. If you don’t already have a place to buy and sell mutual funds, you might want to consider beginning your search using the links below.

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Frequently Asked Questions


Are dividend mutual funds a good idea?


Dividend mutual funds can make a strong addition to any type of investment portfolio. In particular, these funds are useful as you approach retirement age, with dividends helping you to supplement your income. While dividend mutual funds are often outpaced during bull markets, they provide a level of diversification and stability to your portfolio that’s often needed to balance out other investments.


How does a dividend fund work?


Dividend mutual funds work by allowing you as an individual investor to pool your money with other investors. This process makes it easier for individuals to access professional money management services without the millions of dollars often required to hire a personal financial manager. When you purchase shares of a mutual fund, you receive partial ownership in all the assets that make up the fund.

Dividend mutual funds pay out regular dividends on a schedule set by the fund managers based on your individual total investment in the fund. These funds focus on identifying and investing in companies that pay high dividends. You’ll see these dividends held in cash or reinvested in your portfolio depending on your preferences when they are paid out.


Which dividend mutual funds are good?


You can find a list of Benzinga’s recommendations for dividend mutual funds on the list above.