What are the top dividend funds?

+ who are the best brokers & does it make sense to invest large chunks of money

Issue #8. 

Hope you are all doing financially better than last week!  In this week’s edition of the Gist, we’ll compare the major investment companies and brokers, look at top dividend ETFs and mutual funds, and talk about lump sum investing in comparison to dollar cost averaging!

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So here are your questions for today’s edition: 

  1. When it comes to money management, everyone is talking about Vanguard. I find investment management companies such as Fidelity and Schwab equally compelling. What am I missing?

  2. In the last issue of The Gist you discussed dividend stocks. I’m not ready to invest in individual stocks. What dividend funds should I consider instead?

  3. If I have $12K to invest over the course of next 12 months, should I invest the lump sum now, or distribute it evenly over the next 12 months (i.e., $1K each month)?

Let’s give you the summary first.

Summary

  1. Vanguard, Fidelity and Schwab all provide great services. While Vanguard doesn’t provide banking services or have retail presence, it scores high with retail investors because of its quality, inexpensive funds. It’s also owned by its shareholders, thereby securing major interest alignment between its management and investors.

  2. Here are some popular choices for dividend funds measured by net assets under management. Keep in mind, some of those funds offer higher dividend yield than the rest, but they also might be riskier (e.g., high dividend ETFs are known to generate higher returns, but could be more volatile than core dividend funds).

  3. Investing the whole amount at once is called Lump Sum Investing (LSI). Spreading that amount evenly over a period of time is known as Dollar Cost Averaging (DCA). In your specific example, it’s hard to forecast whether investing $12K today will give you a better return than spreading the investment over the next 12 months (because of the market conditions). However, Vanguard has shown that LSI as a strategy has outperformed a DCA strategy based on historical performance.  

Deep Dive

  1. Despite having no retail banking presence, here are the core advantages of Vanguard as an investment manager: 

    • It’s is owned by its funds. The company’s different funds are then owned by the shareholders, who are the true owners of Vanguard.

    • Vanguard has a broader selection of low-cost index funds. Its actively managed funds are generally very low in cost.

    Vanguard, Fidelity and Schwab are great choices for individual investors. However, there are many other options that could be great choices for you.

  2. Keep in mind that not all dividend ETFs and mutual funds are created equal. Some are focused on dividend growth, some on high yield. Before investing in any of those, do your due diligence and understand the underlying risk. It’s to be expected that high-yield dividend ETFs will generate higher returns, but will also incur more risk.

    The top dividend ETFs, ranked by net assets are:

    • Vanguard Dividend Appreciation Index Fund ETF Shares (VIG)

    • Vanguard High Dividend Yield Index Fund ETF Shares (VYM)

    • iShares Select Dividend ETF (DVY)

    • S&P Dividend ETF (SDY)

    • iShares Core High Dividend ETF (HDV)

    • Schwab U.S. Dividend Equity ETF (SCHD)

    The top dividend mutual funds, ranked by net assets are:

    • Vanguard Dividend Growth Fund Investor Shares (VDIGX)

    • Vanguard High Dividend Yield Index Fund Investor Shares (VHDYX)

    • Vanguard Dividend Appreciation Index Fund Admiral Shares (VDADX)

  3. Vanguard found that lump sum investing (LSI), i.e., investing all of your available funds immediately, outperformed the DCA strategy based on historical performance. Since the long-term historical trend of equities has been up, this makes sense intuitively as well; lump sum investors are compensated for investing sooner rather than later.

    Be careful how you interpret this finding; the fact that LSI wins in the majority of cases over DCA doesn’t imply it will be right for you in the current market environment.

That’s it for this edition.  What would you like to hear about in our next Gist?  Ask us a question here.

The AskFinny Team