High dividend or high yield mutual funds provide several benefits to an investment portfolio. Taking the dividends in cash is one way to draw an income from your investments. Another option is to reinvest the dividends back into more shares of the fund. With either investment goal, you can choose from several types of funds that pay above-average dividend rates.
High Dividend Stock Funds
One type of high dividend mutual fund invests in high-dividend-paying stocks. Funds that fit this description fall into the categories of income stock or equity income mutual funds. Investment objectives for these funds can range from a combination of capital appreciation plus income to high yield dividend income with little focus given to share price appreciation. A specific fund's stated investment objectives, the current dividend yield and historical dividend payouts provide the information you can use to see if the fund's dividend approach matches your investment goals.
Focused High Dividend Funds
High dividend stocks are prevalent in certain types of businesses and sectors of the stock market. Public utility companies typically pay attractive and safe dividends. Real estate investment trusts, which are companies that own commercial real estate or provide real estate financing, also pay steady and often high dividends. Mutual funds that focus on either the utility or REIT sectors will pay higher dividends than the stock market average. A global utility fund owns stocks in the sector from around the world, providing added diversity to your portfolio as well as attractive dividends.
High Yield Bond Funds
With mutual funds the term "high yield" usually refers to funds that invest in high yield bonds. Corporate debt securities from companies with lower credit ratings pay some of the highest yields in the investment world. A high yield bond fund pays out the interest earned from the fund's portfolio of bonds as dividends to fund investors. The dividend yield of a high yield fund depends on the credit quality of the bonds the fund owns and current market interest rates for that type of bond. Bond mutual funds typically pay monthly dividends.
High Yield Tax-Free Funds
A high yield tax free fund owns municipal bonds that meet the criteria of lower credit quality and higher yields compared to bonds with safer credit ratings. State and local governments issue municipal bonds, and the interest paid on the bonds is exempt from income taxes. A high yield mini bond mutual fund pays monthly dividends that retain the tax exempt status of the bond interest on the fund's bond portfolio. A tax free bond fund will have a lower yield than a taxable high yield fund, but for investors in the highest tax brackets, the after tax yield may be more attractive.
Tim Plaehn has been writing financial, investment and trading articles and blogs since 2007. His work has appeared online at Seeking Alpha, Marketwatch.com and various other websites. Plaehn has a bachelor's degree in mathematics from the U.S. Air Force Academy.