There are a lot of mutual funds and ETFs promoting themselves as “dividend” funds. In fact, when I screened over 9,100 US-traded mutual funds and ETFs, 437 of them had the word “dividend” in their name. Since regulators are quite strict about funds being truthful about what their names imply, I was curious to see just how many of these dividend funds actually produced dividend yields that were substantive. After all, it is one thing for a fund to earn dividends, it is another for those dividends to be sufficient to put food on the table for retired or retiring investors. A 1% or 2% yield won’t cut it for most investors, and a 3% yield is probably cutting it close for many as well.
An exhaustive search of “Dividend” funds leads to an interesting discovery.
Note that I simply looked at funds that have the word “dividend” in their title, which means that I likely ignored many funds that invest in more narrow slices of the income-equity market. For instance, REIT and Utility sector funds probably pay fairly high yields, but they also come with the risk that investing in a single sector contains. I did not have a minimum size for each fund, but I did have a minimum yield requirement of 0.01%. I figured that if a fund calls itself a dividend investment but produces zero dividends, it is not worth being in this discussion anyway.
There are also plenty of funds that use the term “income” instead of dividend. But since these funds probably gather income from sources other than common stock dividends (preferred stocks, convertible bonds, and other bond types produce yield but not through common stock dividends), I excluded them. I am focused here on dividends, which are paid out of corporate earnings, and are not debt instruments, which bonds are.
What’s In a Name?
Here is a summary of what this little study of 437 “dividend” mutual funds and ETFs produced:
You see that the average yield of the 437 funds was a mere 2.09%, and the median was just 1.90%. That latter figure is about the current yield of the S&P 500 Index. The bottom line is that the average fund in this group is not producing more yield than the broad stock market.
This underlines one of my key takeaways from dividend investing in general: it is NOT like investing for appreciation. There are times when you give up total return and the potential for sky-high returns over shorter time periods in order to know that you are going to “get paid” by your stock portfolio via the regular stream of dividends.
These statistics do not show is that these funds are doing something other than what they advertise. I do believe that investors and in some cases their financial advisors are oversimplifying the concept of dividend investing, and are giving themselves a false sense of comfort about how much these funds will protect their wealth during substantial market declines.
Most Funds Fall Short on Yield
Looking deeper, we see that only about 6% of the funds yield more than 4%. So, 94% of them do not meet the requirements of investors whose financial planners have projected that a 4% rate of return will allow them to outlive their assets in retirement. That 4% concept is very popular in the investment planning business, but I wonder how many planners and investors are really thinking about the realities of today’s stock and bond markets, and how they are conspiring against investors who simply assume that what worked in the past will work in the future.
Over 17% of the funds yield over 3%. That’s a lot better than the 4% group, but it sure is pretty low for a bunch of “dividend” investments. That is largely a reflection of the market environment, in which high-yield stocks are less plentiful after 8 years of generally rising stock prices. But I think the bigger factor is that the fund companies are using dividend investing as both a valuation and marketing technique. Yield is a primary objective of the funds, but the LEVEL of yield is not. This is the key disconnect between the fund companies, the financial advisors, and the end client.
Finally, nearly 12% of the funds yield less than 1%. This adds emphasis to what I just said about the disconnect between the parties involved here.
Dividend investing means different things to different investors. The point of this article was to show that there is more to the word “dividend” than meets the eye when discussing what a mutual fund or ETF is trying to accomplish. Funds can meet their stated objectives without meeting yours. That’s something to keep in mind at a time when the stock market appears to be roaring, but your objectives are more about getting paid on a regular basis.
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Comments provided are informational only, not individual investment advice or recommendations. Sungarden provides Advisory Services through Dynamic Wealth Advisors.