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What are some benefits of high-dividend mutual funds?

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Quick Answer

High-dividend mutual funds are useful for people looking to receive fairly consistent sources of income from their investments, explains About.com. They also help investors avoid fluctuations in stock prices. In general, high-dividend mutual funds aim for dividends over all other concerns including capital growth.

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Full Answer

Retired individuals, or those looking to retire, often invest in high-dividend mutual funds to help provide a source of income that they can access without having to draw on their invested capital, explains About.com. Additionally, investors often use dividends from high-dividend mutual funds to reinvest in more shares of that high-dividend mutual fund. Dividend mutual fund managers generally gear these funds towards less-aggressive investments.

High-dividend mutual funds differ only from regular dividend mutual funds in that they focus solely on dividend returns, whereas dividend mutual funds managers also try to balance capital growth with dividend returns, states The Street. Dividend mutual funds differ from other types of income-focused funds, such as fixed-income funds, which invest mostly in government and corporate bonds that offer guaranteed returns.

Experts recommend that investors consider buying dividend mutual funds within a 401(k), IRA or other tax-friendly account to help avoid or reduce taxes paid on income from dividend mutual funds, states About.com. The IRS generally categorizes dividends as regular income, although the IRS taxes some qualified dividends at much lower levels.

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