A dividend fund is a type of mutual fund that invests in companies that pay dividends to provide investors with a regular stream of income. This is an opposite strategy to investing in companies that reinvest profits to maximize share price. Income funds, including dividend funds, are popular in Canada. Professional finance companies manage dividend funds, but investors should compare the return on investment with the commission fee.
A dividend fund is a mutual fund with an underlying investment strategy to buy shares in companies that pay dividends. The fund provides investors with a regular stream of income, as dividends are paid to holders of mutual fund shares on a regular basis. Investing in companies that pay dividends is an opposite strategy to investing in companies that try to maximize their share price by investing profits back into the company.
Mutual funds allow investors to pool their resources to buy stocks in an investment portfolio made up of many companies that are grouped around a common evaluator, such as company size or geographic location, rather than having investors buy company shares directly. The average mutual fund focuses on capital appreciation, or the estimate that a company’s stock price will rise, increasing the value of the shares the fund owns. However, this is not the only investment strategy. A dividend fund adds companies that distribute earnings in the form of dividends to shareholders rather than reinvesting earnings in the company to increase its value.
An investor who chooses a dividend fund over a capital appreciation fund is likely to be looking to hold their investment for a long period of time. The goal would be to use investment distributions as a source of annual income rather than as an investment that could be sold for the benefit of an appreciating stock price at any time. This is why a dividend fund is considered a type of income fund.
Income funds are particularly popular in Canada. The Canadian government has established several types of entities, such as the Royalty Trust and the Income Trust, which have special features designed to distribute proceeds to investors. Canadian companies are often well represented in US-based income funds for precisely this reason.
As with any mutual fund, a dividend fund is professionally managed by finance companies who 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 percentage return on investment with the percentage paid in commissions. Income generation can be a goal in itself, but it can only complement an analysis of whether that same investment would ultimately generate more money if invested in a different way.
Smart Asset.
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