Best Dividend Paying Mutual Funds with High Income

If you read our article on Why to Invest in Dividend Paying Mutual funds, you know dividends make a very important part of any investor's portfolio. Dividends provide an instant cash flow return on your investment and also act as a downside protector in bear markets. Also, the US stock markets have lost 2% annualized over the last 10 years. If you were invested in dividend paying mutual funds during this time, you would probably have made 5% compounded annual gains. In this article, we will go over 10 best mutual funds that pay dividends. You should also make sure your mutual fund investments are well diversified ranging from high income bond funds, utilities, telecommunications & real estate dividend paying funds, exposure to high quality emerging markets companies, Large Cap dividend paying companies & some exposure to Small caps.

i) T. Rowe Price Equity Income (PRFDX)

The T.Rowe Price Equity Income mutual fund is a great no-load mutual fund that invests in large cap dividend paying American companies such as Chevron Corp, JP Morgan Chase, General Electric, ExxonMobil Oil, Bank of America, American Express, etc. According to MorningStar, the fund has returned an average 5.26% annual return for the last 10 years. Hence, a $10,000 investment in 2001 would have grown to $15,266 as of today. This is great performance even though most mutual funds have lost money during this period. The stellar performance is thanks to dividend paying stocks contained in the portfolio. T. Rowe Price Equity Income currently yields 1.72% and has $23.3 billion in assets under management. The fund is managed by Brian C. Rogers who joined the fund in October 1985. Management's investing philosophy is to find high yielding dividend paying companies that are Large cap & will be around in 30 years or more. The fund's top 10 holdings as of April 30th, 2011 are:

  1. 3M
  2. AT&T
  3. American Express
  4. Chevron
  5. Exxon Mobil
  6. General Electric
  7. JPMorgan Chase
  8. Royal Dutch Shell
  9. Time Warner
  10. Wells Fargo


ii) Vanguard Dividend Growth Inv (VDIGX)

Vanguard Dividend Growth mutual fund is a large cap blend fund that invests in large companies spanning across Industrials, Consumer Defensive, Healthcare, Energy & Consumer Cyclical dividend paying stocks e.g. Pfizer Inc, Automatic Data Processing (ADP), ExxonMobil Corp, BG Group plc, etc. The fund is a no-load fund and yields 1.75% dividends with $5.7 billion in assets under management. The fund has returned 3.3% annual gain since 2001 hence a $10,000 investment in 2001 would have grown to $13,326 today. The fund is led by Donald J. Kilbride who joined in 2006 and has a philosophy of investing in companies that will grow their dividends in 5-10 years from now. The fund also has a very low expense ratio of 0.34%. The fund has a total of 47 stocks as of April 30th, 2011 and 6.5% of them are foreign stocks. The top ten holdings of the fund are:

  1. Automatic Data Processing Inc
  2. Exxon Mobil Corp
  3. Pfizer Inc
  4. BG Group PLC
  5. PepsiCo Inc/NC
  6. Western Union Co/The
  7. Medtronic Inc
  8. International Business Machines Corp
  9. General Dynamics Corp
  10. Cardinal Health Inc


iii) Franklin Utilities (FRUAX)

Franklin Utilities is a low-fee mutual fund that yields 3.44% in annual dividends and has $3 billion in assets under management. The fund is led by John Kohli who started with the fund in 1998. Franklin Utilities invests in high quality utility companes that pay high dividends. E.g. Southern Company, Sempra Energy, NextEra Energy, PG&E Corp, Entergy Corp, etc. All Americans need utilities & electricity in their homes, thus this fund takes advantage of smaller regional Utilities companies that pay high dividends. E.g. Sempra Energy is a holding company of 6 other regional utility companies including San Diego Gas & Electric, Southern California Gas, Sempra Liquified natural gas, etc. Over the last 10 years, the fund has outperformed the S&P 500 by returning an annual return of 6.87% which is really impressive. A $10,000 investment in 2001 would have grown to $19,476 in 2011 which represents a growth of 94.7%. Dividends accounted for almost 26% of this fund's great performance. If you read the fund's strategy from the link below, we find out that the fund seeks to maximize opportunities in the U.S. electricity and gas sector finding regulated utilities due to their more predictable earnings and cash flow. What I don't like about this fund is the initial 4.25% sales charge. Talk to your 401k plan administrator to see if you can skip paying this sales charge and still be invested in the fund i.e. if you are interested in investing in this fund. The fund's top 10 holdings as of March 31st, 2011 are:

  1. Southern Company
  2. Sempra Energy
  3. NextEra Energy Inc
  4. PG&E Corp
  5. Entergy Corp
  6. Edison International
  7. American Electric Power Company Inc
  8. FirstEnergy Corp
  9. Public Service Enterprise Group Inc
  10. Progress Energy Inc


iv) Fidelity New Markets Income (FNMIX)

Fidelity New Markets Income fund is a low fee bond mutual fund that invests 80% of its assets in emerging markets bonds & debt securities. The fund has $3.9 billion in assets under management and yields a high 5.4% dividend. The fund has diversified investments in emerging market bonds including Russia Federation bonds, Philippines bonds, Turkey Republic bonds, IRAQ & Venezuela Government bonds. According to MorningStar, the fund has 61% assets in foreign government bonds & 31% assets in foreign corporate bonds. A $10,000 investment in this fund in 2001 would have grown to over $30,191 in 2011 representing average annual returns of 11.87%. The fund has a management expense ratio of 0.89% which is slightly above average of other mutual funds. Emerging market bond funds tend to be of higher risk because of political & economic environments, government policies, interest rate risks, etc. The fund's top 10 holdings as of March 31st, 2011 are:

  2. USTB 4.75% 2/15/41
  3. USTB 4.25% 11/15/40
  4. VENEZUELA REPUB 12.75% 8/23/22
  6. IRAQ REP 5.8% 1/15/28 REGS
  7. RUSSIA FED 12.75% 6/24/28 REGS
  8. PHILIPPINE GLBL 7.75% 1/31 EC
  9. TURKEY REP 5.625% 3/30/21
  10. PDVSA 12.75% 2/17/22 144A


v) T. Rowe Price Real Estate (TRREX)

T. Rowe Price Real Estate fund aims to invest 80% of its assets in equities of real estate companies with a view to provide long term capital growth & current income through dividends. It currently has a market capitalization of $3 billion and yields a 2.10% dividend. This fund holds REITs (Real Estate Investment Trusts) that are required by law to distribute 90% of their profits to shareholders, thus paying high dividends. Examples of such companies that this fund holds include Boston Properties, SL Green Realty Corp, Vornado Realty Trust, etc. As an example, Vornado Realty Trust owns business interests in New York Office Properties; Washington, DC Office Properties; Retail Properties; Merchandise Mart Properties, and Toys R Us (Toys). Vornado also owns a 646,000 square foot retail property located in California that it leases to commercial customers and receives rental revenue. The top 10 holdings of this fund as of March 31st, 2011 are:

  1. AvalonBay Communities
  2. Boston Properties
  3. Equity Residential
  4. Federal Realty Investment Trust
  5. Host Hotels & Resorts
  6. Public Storage
  7. SL Green Realty
  8. Simon Property Group
  9. The Macerich Co
  10. Vornado Realty Trust