Get Income And Growth From Dividend-Paying Stock Funds

by Alan Lavine and Gail Liberman

Dividends are what count today. Why not own a stock that pays 2 percent to 3 percent in dividends, and has an opportunity to grow along with company profits?

Mutual funds that invest in dividend-paying stock funds typically own undervalued stocks in relation to the company’s earnings outlook. This year-to-date, funds that invest in under priced large company stocks are up about 13 percent. That's not bad, considering the dividend yield of the funds averages about 2 percent.

Thanks to the new tax laws, investors should only pay 15 percent income tax on their stock fund’s dividends. Prior to the new rules, you were stuck paying ordinary income tax on dividends, according to your tax bracket.

Some of the best-rated large company value funds include American Century Large Cap Value Fund, Clipper Fund, American Funds’ Washington Mutual Fund, MFS Value Fund, T. Rowe Price Equity Income Fund, and Van Kampen Growth and Income Fund, according to Morningstar Inc., Chicago.

But now there is a new dividend-paying stock fund to consider. The recently introduced Waddell & Reed Advisors Dividend Income Fund is managed by one of the nation’s oldest mutual fund groups. Read the fund’s prospectus, though, and watch how it performs for a while compared with similar funds before you invest. The Waddell & Reed fund group, of Overland Park, Kansas, has a reputation for managing solid funds. Most of the group’s existing stock funds carry above-average ratings by Morningstar over the past three years. 

The new fund seeks to provide income and long-term capital growth by investing primarily in dividend-paying common stocks that show strong prospects for long-term growth.

David P. Ginther, fund manager, says the new fund is expected to take advantage of the increasingly favorable climate for dividend-oriented investments. There has been an increase in the number of dividend-paying companies, an increase in overall yield of the S&P 500 index, and the recently enacted federal tax reduction on qualified dividend income, he notes.

The fund, under normal conditions, plans to invest at least 80 percent of its assets in financially strong companies that should pay attractive dividends and outperform the earnings of competitors over the long term. The fund seeks to avoid investments in financially weak companies that pay higher-then-average dividends.

The fund will invest primarily in large companies based in the United States, but may also invest in companies of any size, and up to 25 percent in foreign companies.

Alan Lavine and Gail Liberman are husband-wife personal finance columnists, journalists and authors. They are the authors of "The Complete Idiot's Guide to Making Money with Mutual Funds," published by Alpha Books. Their columns appear in newspapers throughout New England and the Southeast, as well as online. Their commentary on mutual funds and personal finance is carried by 200 radio stations nationwide every Sunday over Business News Network's Charles DeRose Financial Advisor Show.

More articles by Al and Gail can be found here.