Personal Finance
What investors need to consider when choosing a dividend-paying fund
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For investors who want income, dividends may provide an answer.
Dividends are corporate profits that companies pay to shareholders in the form of either cash or stock.
In comparison to other income-paying investments — such as certificates of deposit, bonds or Treasurys — dividends may provide the opportunity for more appreciation, said Leanna Devinney, vice president and branch leader at Fidelity Investments in Hingham, Massachusetts.
“Dividends can be very attractive because they offer the opportunity for growth and income,” Devinney said.
Dividend investment options may come in the form of single company stocks or dividend-paying funds, like exchange-traded funds or mutual funds.
With individual stocks, it’s easy to see the dividend a company may offer in exchange for owning its share, Devinney said. Notably, not all companies pay dividends.
However, dividend-paying funds like ETFs or mutual funds may provide a broader exposure to dividend securities, often at lower costs, she said.
For investors who are considering putting a portion of their portfolios in dividend-paying strategies to fulfill their income-seeking goals, there are some things to consider.
What kind of dividend-paying fund fits my goals?
Generally, there are two types of dividend funds from which to choose, according to Daniel Sotiroff, senior analyst for passive strategies research at Morningstar.
The first group focuses on high dividend yield strategies. Dividend yield is how much a company pays in dividends each year compared to its stock price. With high-yield strategies, the investor is trying to get higher income than the market generally provides, Sotiroff said.
High-yield dividend companies tend to have been around for decades, like Coca-Cola Co., for example.
Alternatively, investors may opt for dividend growth strategies that focus on stocks expected to consistently grow their dividends over time. Those companies tend to be somewhat younger, such as Apple or Microsoft, Sotiroff said.
To be clear, both of these strategies have trade-offs.
“The risks and rewards are a little bit different between the two,” Sotiroff said. “They can both be done well; they can both be done poorly.”
If you’re a younger investor and you’re trying to grow your money, a dividend appreciation fund will likely be better suited to you, he said. On the other hand, if you’re near retirement and you’re looking to create income from your investments, a high-yield dividend ETF or mutual fund is probably going to be a better choice.
To be sure, some fund strategies combine both goals of current income and future growth.
How expensive is the dividend strategy?
Another important consideration when deciding among dividend-paying strategies is cost.
One dividend fund that is highly rated by Morningstar, the Vanguard High Dividend Yield ETF, is well diversified, which means investors won’t have a lot of exposure to one company, he said. What’s more, it’s also “really cheap,” with a low expense ratio of six basis points, or 0.06%. The expense ratio is a measure of how much investors pay annually to own a fund.
That Vanguard fund has historically provided a yield of about 1% to 1.5% more than what the broader U.S. market offers, which is “pretty reasonable,” according to Sotiroff.
While investors may not want to add that Vanguard fund to their portfolio, they can use it as a benchmark, he said.
“If you’re taking on higher yield than that Vanguard ETF, that’s a warning sign that you probably have exposure to incrementally more volatility and more risk, Sotiroff said.
Another fund highly rated by Morningstar is the Schwab U.S. Dividend Equity ETF, which has an expense ratio of 0.06% and has also provided 1% to 1.5% more than the market, according to Sotiroff.
Both the Vanguard and Schwab funds track an index, and therefore are passively managed.
Investors may alternatively opt for active funds, where managers are identifying companies’ likelihood to increase or cut their dividends.
“Those funds typically will come with a higher expense ratio,” Devinney said, “but you’re getting professional oversight to those risks.”
Americans are growing increasingly uneasy about the state of the U.S. economy and their own personal financial situation in the face of stubborn inflation and tariff wars.
To that point, 73% of respondents said they are “financially stressed,” with 66% of that group pointing to the tariff wars as a main source, according to a new CNBC/Survey Monkey online poll.
The survey of 4,200 U.S. adults was conducted April 3 to 7.
Americans feeling financially stressed
CNBC/Survey Monkey polls from 2023, 2024, and this year have found that, on average, more than 70% of Americans said that they are stressed about their personal finances. This year’s survey found that 38% of respondents overall said they are “very stressed,” and 29% of high-earners with incomes of $100,000 or more also shared that sentiment.
Consumers are, of course, increasingly stressed by rising prices for essentials like food, energy, and shelter. This is due to a number of factors, including rising inflation, supply chain disruptions and geopolitical events.
In the new CNBC survey, 86% of Americans cite inflation as the top reason for their financial stress, while 75% pointed to interest rates and 66% cited tariffs.
While inflation peaked at 8% in 2022, a 40-year high, it has since cooled significantly, reaching 2.4% in March. Despite this decline, the increased prices during 2022 have led to a loss of purchasing power for Americans, meaning they can buy less with the same amount of money than before.
It would take nearly $114 today to buy what would have cost $100 in January of 2022, according to the Bureau of Labor Statistics.
And while Inflation has eased, experts do say the fallout from President Trump’s trade war threatens to put upward pressure on prices in the months to come.
Tariffs are generally considered to be inflationary, economists say. This is because tariffs increase the cost of imported goods, which can then be passed on to consumers in the form of higher prices. This can lead to a temporary increase in the overall inflation rate.
“We know that tariffs are inflationary,” said David McWilliams, an economist, podcaster and author. “We know that’s hitting on people’s expectations of how much money they’re going to have in their pocket in a couple of months time.”
So, when it comes to financial stress caused by tariffs, 59% of those surveyed by CNBC oppose President Trump’s tariff policy, with 72% concerned about the impact on their personal financial situation.
As a result, 32% said they have delayed or avoided making retail purchases, and 15% said they have “stocked up.”
What’s more, 34% of those surveyed said they have made changes to their investments due to recent stock market volatility from tariffs.
Handling financial stress
Many investors are concerned about their retirement savings, but financial experts say it’s important for those with a long-term perspective to understand that short-term market volatility is a distraction that’s better off ignored.
“The biggest thing is that it’s unknown, and when we don’t know things, and we can’t control things, that’s when our anxiety and our worry can spike, and it’s contagious,” said licensed therapist and executive coach George James, CNBC Global Financial Wellness Advisory Board member, a licensed therapist and executive coach.
While the market could be in for a bumpy ride over the next few months, experts say it’s best to stay the course and avoid making major portfolio changes based on the latest news.
To manage investments during the latest tariff volatility, for example, financial advisors urge investors to maintain a long-term perspective, review and potentially adjust their asset allocation, and consider diversification to mitigate risk. It’s also smart to bolster emergency funds, review your risk tolerance, and explore opportunities for tax-loss harvesting.
Financial experts also urge investors to focus on their risk appetite — and their goals.
“This is the time to evaluate short-, mid-, and long-term financial needs, concerns, and goals. Evaluation before action or inaction is essential,” said Michael Liersch, head of advice and planning at Wells Fargo, said in an e-mail to CNBC. “Getting specific on exact dollar targets, timelines around these targets, and their level of importance [priority] can create clarity around what should be done, if anything.”
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As investors digest the latest bond market sell-off, advisors have tips about portfolio allocation amid continued market volatility.
Typically, investors flock to fixed income like U.S. Treasurys when there’s economic turmoil. The opposite happened this week with a sharp sell-off of U.S. government bonds, which dropped bond prices as yields soared. Bond prices and yields move in opposite directions.
Treasury yields then retreated Wednesday afternoon when President Donald Trump temporarily dropped tariffs to 10% for most countries but increased levies on Chinese goods. That duty now stands at 145%.
As of Thursday afternoon, Treasury yields were down slightly.
Still, “there’s a massive amount of uncertainty,” Kent Smetters, a professor of business economics and public policy at the University of Pennsylvania’s Wharton School, told CNBC.
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Experts closely watch the 10-year Treasury yield because it’s tied to borrowing rates for products like mortgages, credit cards and auto loans. The yield climbed above 4.5% overnight on Tuesday as investors offloaded the asset. As of Thursday afternoon, the 10-year Treasury yield was around 4.4%.
Kevin Hassett, director of the U.S. National Economic Council, told CNBC on Thursday that bond market volatility likely added “a little more urgency” to Trump’s tariff decision.
As some investors question their bond allocations, here’s what advisors are telling their clients.
Take the ‘proactive approach’
Despite the latest bond market sell-off, there hasn’t been a recent shift in client portfolios for certified financial planner Lee Baker, owner of Apex Financial Services in Atlanta.
“I’ve been taking a proactive approach” by shifting allocations early based on the threat of future tariffs, said Baker, who is also a member of CNBC’s Financial Advisor Council.
With concerns about future inflation triggered by tariffs, Baker has increased client allocations of Treasury inflation-protected securities, or TIPS, which can provide a hedge against rising prices.
Consider ‘guardrails’
Ivory Johnson, a CFP and founder of Delancey Wealth Management in Washington, D.C., has also been defensive with client portfolios.
“I’ve used instruments to give me guardrails,” such as buffer exchange-traded funds to limit losses while capping upside potential, said Johnson, who is also a member of CNBC’s FA Council.
Buffer ETFs use options contracts to provide a pre-defined range of outcomes over a set period. The funds are tied to an underlying index, such as the S&P 500. These assets typically have higher fees than traditional ETFs.
Take a ‘temperature check’
With future stock market volatility expected, investors should revisit risk tolerance and portfolio allocations, Baker said.
“This is a good time for a temperature check,” he said.
Market turmoil has happened before and will happen again. If you can’t stomach the latest drawdowns — in stocks or bonds — this is a chance to shift to more conservative holdings, Baker said.
“We’re not selling because I’m concerned about the market,” he added. “I’m concerned about comfort level.”
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