Dividend Mutual Funds Offer Passive Income And Inflation Protection

High Dividend Mutual Funds are (generally) open-ended mutual funds which aim to provide a high, stable, and gradually rising income stream. While capital appreciation is usually pursued as a secondary goal, the goal of most of the best dividend mutual funds is stability and safety of income.  They can be excellent passive income stream.

Dividend mutual funds are generally equity funds (although some balanced funds such as Wellesley Income might also qualify).  As such, dividend funds are subject to sometimes large fluctuations in value due to lower earnings reported by the company, changes in the amount of dividend paid, internal policy adjustments, business cycle and legal issues, to name a few.  And like any stock fund,  the dividends are not guaranteed. This is why diversification of the stock portfolio is of paramount importance in order to avoid the risk of heavy losses emanating from a single holding.

What Constitutes A Good Dividend Mutual Fund

Good dividend mutual funds tend to have a few things in common.

• Above-Average Yield – We’re only interested in high yield dividend mutual funds.  A dividend fund whose yield isn’t significantly greater than the overall stock market isn’t worth owning.
• Diversified By Sector – Many dividend funds focus on the financial sector, which tends to be a problem during a global financial collapse.  Financial firms tend to be high yields so this will probably always be an issue, but you should avoid owning a closet financial sector fund.
• History Of Rising Dividends – Over time, dividend payments from stocks should rise at least at the rate of inflation.  Good high dividend yield mutual funds should grow their dividends at least this quickly over long periods of time (say, 5 or 6 years).
• Below-Average Volatility – Theoretically, you should completely ignore price fluctuations and focus only on cash flow.  But being human, you aren’t going to be able to do that.  A good dividend mutual fund should ideally exhibit less volatility than the overall market.   High dividends should help with that.

Cash flow is everything in retirement, especially when you retire early.  A good dividend fund (which could be a value index fund) can help you achieve strong inflation-adjusted cash flow without too much risk to principal.  It goes without saying that any dividend-focused funds should be owned in the context of a diversified portfolio i.e. never put all your eggs in one basket, no matter how nice that basket may be.