If a financial adviser ever asks, "How do you like your dividends? " fight the urge to answer with "Regular and large, thank you. " The way you...
If a financial adviser ever asks, “How do you like your dividends?” fight the urge to answer with “Regular and large, thank you.”
The way you want to pursue dividends is a real decision for fund investors these days. It’s not just that yields have improved over the past few years. It’s that fund companies keep developing more and different products.
It’s no longer a choice between fund families and plain-vanilla styles. It’s a choice among pursuing dividends in a traditional mutual fund, a closed-end fund or an exchange-traded fund.
A decade ago, investors seeking dividend income simply chose among funds that used “growth and income,” “equity-income” or “dividend growth” in their name. That worked fine until the go-go market of the late 1990s, when many dividend-oriented funds earned so little in payouts that data trackers stopped taking the income seriously and came up with categories that described what a fund owned, rather than what management had promised it would do.
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Investors loved the growth so much that they didn’t mind that the bull market had trampled dividend yields.
The bear market, of course, reversed the trend, clawing at growth and reviving stodgy dividend-oriented strategies. The market beat-down also helped make dividend yields look just a bit more attractive.
Today, anyone who can’t see the next wave of performance coming from an expansion of price-earnings ratios recognizes that dividends are a key element of generating a reasonable total return.
What’s more, many big-name bull-market stocks, such as Microsoft, have matured to where they pay dividends, winning over even more growth converts.
The heightened interest is smart, but the proliferation of choices can be confusing, particularly exchange-traded and closed-end funds, which average investors may not fully understand.
Exchange-traded funds are built and managed like an index fund — meaning they offer low-cost, passive management — but trade like a stock. Exchange-traded funds come in a wide variety of flavors, each pegged to an index with a slightly different tweak on the process.
Closed-end funds, meanwhile, are similar, though they more resemble an actively managed fund that trades like a stock.
What’s more, closed-end funds may use leverage, which can goose the yield — thereby luring more investor interest — but also make the return more volatile.
For a dividend investor, deciding which route to take involves answering two key questions, one personal and one specific to the funds under consideration:
How much am I investing and over what time period? What is the cost of ownership?
“It’s not as easy as buying something with ‘dividend’ in the name, that’s for sure,” says Jeff Tjornehoj, research analyst for Lipper.
“It comes down to finding a strategy you believe in, and then finding the type of vehicle that can best deliver the results you expect from that strategy.”
Chuck Jaffe is senior columnist
at CBS Marketwatch.
He can be reached at email@example.com or Box 70, Cohasset, MA 02025-0070.