A dividend fund is a mutual fund that invests in companies that pay dividends, providing investors with regular income. It is an opposite strategy to capital appreciation funds. Income funds, including dividend funds, are popular in Canada. Professional management comes at a cost, so investors should compare returns and commissions.
A dividend fund is a mutual fund with an underlying investment strategy to buy shares of companies that pay dividends. The fund provides investors with a regular stream of income, as dividends are paid regularly to the mutual fund’s stockholders. Investing in companies that pay a dividend is an opposite strategy to investing in companies that seek to maximize their share price by reinvesting profits back into the company.
Mutual funds allow investors to pool their resources to buy shares in an investment portfolio made up of many companies grouped around a common value, such as company size or geographic location, rather than requiring investors to buy shares directly from the companies. The average mutual fund focuses on capital appreciation, or an estimate that a company’s stock price will rise, increasing the value of the shares held by the fund. However, this is not the only investment strategy. A dividend fund aggregates companies that distribute profits in the form of dividends to shareholders rather than reinvesting the profits into the company to increase its value.
An investor who chooses a dividend fund over a capital appreciation fund is likely looking to hold onto his investment for an extended period of time. The goal would be to use investment distributions as a source of annual income rather than an investment that could be sold to reap the benefit of an appreciating share price at any time. This is why a dividend fund is considered a type of income fund.
Income funds are especially popular in Canada. The Canadian government has established a number of entity types, such as royalty fund and income fund, which have special features designed to distribute profits to investors. Canadian companies are often well represented in US-based income funds for this very reason.
As with any mutual fund, a dividend fund is professionally managed by financial firms that specialize in determining which companies should be included in the fund. Investors are charged a fee for this service which can undermine the value of the dividend payout. It is important to compare the percentage of return on investment with the percentage paid in commissions. Income generation may be a goal in itself, but it can only complement an analysis of whether the same investment would ultimately make more money if invested differently.
Smart Asset.
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