Beat Market Volatility With High Dividend Mutual Funds

Historically speaking, the stock market has provided the highest long-term returns of any highly-liquid investment, better than bonds and even real estate. When all the years since the Great Depression are averaged together, the growth of the Dow Industrial Average has been a whopping 7% per year (not including dividends), far outstripping any other investment vehicle currently available. Of course, within those 80 or so years, there have been periods of stunningly strong growth (like the late 1990s) and periods of time when the market has languished (the 70′s), or even plunged in value (as we have seen during the last three years). While most investors would prefer a steady return on their investment, the nature of the market is often more like a roller coaster than a ski lift.

One strategy that always gains in popularity during rough markets is dividend investing. The theory is that fluctuations in principal are meaningless to many investors, especially investors with an already-large net worth.  Cash flow, they say, is far more important.  And dividends offer cash flow even in bad markets.   The trade-off, of course, is that higher dividends today often lead to lower total returns over the long run.  For many investors, it’s a trade-off worth making.   And unless you are an expert investor with loads of free time available to spend researching individual companies, investing in high yield dividend mutual funds would be a wise strategy. High dividend mutual funds are professionally managed (and sometimes indexed) mutual funds that specialize in investing exclusively in companies that currently offer a high annual dividend and are expected to continue to do so in the future.

For those new to the concept, a dividend is a cash payout made by a company to its shareholders. Dividends are usually paid out on a quarterly basis and are announced several weeks before the payments are made. This system allows a company that has made money during the last quarter to disburse part of that profit to its shareholders. Of course, the dividend payment is reflective of the current profitability of the company in question; lower profits mean lower dividend yields and higher profits mean higher dividends, or even an occasional special one-time dividend payment in the case of an exceptionally good year.

The beauty of high yield mutual funds is that they offer two ways to win in the investment game. First, the dividends generate a relatively predictable income stream from your investment portfolio, which you can either spend or reinvest. Secondly, since companies that return steady dividends are, by definition, profitable businesses, their share price can also be expected to increase steadily during bull markets, further increasing the value of your portfolio. While investing in the stock market always involves a certain amount of risk, the “bird in the hand” approach to investing represented by dividend mutual funds can dampen volatility and help yield-hungry investors stay the course, even if they can’t boost long-term returns.