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What is a Dividend Fund?

Terry Masters
Terry Masters

A dividend fund is a mutual fund with an underlying investment strategy to purchase stocks in companies that pay a dividend. The fund provides investors with a regular stream of income, since the dividends get paid out to the holders of shares of the mutual fund on a regular basis. Investing in companies that pay a dividend is an opposite strategy to investing in companies that try to maximize the price of their shares by investing profits back into the company.

Mutual funds enable investors to aggregate their resources to buy shares in an investment portfolio comprised of many companies that are grouped around a common evaluator, such as company size or geographic location, rather than having investors buy shares of stock from the companies directly. The average mutual fund focuses on capital appreciation, or the estimation that a company’s stock price will go up, increasing the value of the shares held by the fund. This is not the only investment strategy, however. A dividend fund aggregates companies that distribute profits in the form of dividends to stockholders rather than reinvesting profits in the company to increase its value.

Woman with hand on her hip
Woman with hand on her hip

An investor who chooses a dividend fund over a capital appreciation fund is likely looking to hold his investment for an extended amount of time. The goal would be to use the investment distributions as a source of annual income rather than as an investment that might be sold to reap the benefit of an appreciated stock price at any time. This is the reason that a dividend fund is considered a type of income fund.

Income funds are particularly popular in Canada. The Canadian government has established a number of entity types, such as the royalty trust and the income trust, that have special features designed to distribute profits back out to investors. Canadian companies are often well represented in U.S.-based income funds for precisely this reason.

As with any mutual fund, a dividend fund is professionally managed by financial companies that specialize in determining which companies should be included in the fund. Investors are charged a fee for this service that can undermine the value of the dividend distribution. It is important to compare the percent return on the investment against the percentage paid in fees. The generation of income can be an objective in itself, but it can only supplement an analysis of whether or not that same investment would ultimately make more money if invested in a different way.

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