The average dividend mutual fund has outperformed the S&P 500 in the past 15 years. Their holdings pay out significant portions of earnings, which can help limit their stocks' decline during bear markets. Thus the average dividend mutual fund would have turned an investment of $10,000 on March 31, 2000, into $25,515 by May 19 this year, according to Morningstar Inc. data. The S&P 500 would have turned the same investment into $18,989. But dividend funds can lag during bull phases of the stock market, when growth companies that pay little or no dividends get rewarded for plowing earnings back into productive businesses.
Mutual funds pay out to their shareholders virtually all of the dividends collected from fund holdings. So that makes many dividend funds a possible source of income for investors, particularly those in retirement plans. So in addition to providing diversification for a portfolio and minimizing volatility, dividends can be a source of income. In fact, investors disappointed with low bond yields in recent years, can find better opportunities in dividend funds. Investors can choose to have funds' dividend distributions sent to them or their cash accounts, or they can choose to reinvest the payouts back into their funds.
Source: Investors.com
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