5 Reasons to Choose a Mutual Fund That Pays Monthly Dividends Versus One That Focuses Only On Growth
By Howard Feigenbaum
Two of the major mutual fund investment styles are growth and income. Here are five reasons to choose a mutual fund that pays monthly dividends versus one that focuses only on growth.
1. Receiving profit in the present is better than receiving promised profit in the future. Making a profit is what business is about. If you are participating in the ownership of companies, which is what stock investing represents, receipt of profit should be a welcomed event. Stock dividends are the way successful companies share profits with stockholders. An alternative to dividend investing is growth investing. Growth stocks pay little or no dividends. Growth companies need their capital, including profits, to operate the business. With growth stocks, investors rely on an increase in the future price of the shares to reward their risk. The future is less certain than the present.
2. Monthly dividend reinvestment allows you to increase your ownership shares. When there is continuous reinvesting of dividends, more shares are added to your portfolio--especially during periods of market decline when prices are lower. During periods of decline, the growth investor is still waiting and hoping that the share price will increase. The growth investor needs the market price to go higher than the price he or she originally paid in order to receive an investment reward. The dividend investor does not. The dividend itself is profit.
3. The capital gains tax rate (a lower rate than ordinary income tax) currently applies to dividends from stock held for more than one year. This is the same rate that applies to profits made from the sale of growth shares--which has a greater investment risk.
4. Dividends represent good value historically. It has been estimated that over the past 100 years, forty percent of the stock market's gains have come from dividends. The remaining sixty percent of market gains is from share price increases--a more unpredictable result. A good example of how measuring income compares with measuring growth can be seen in real estate. If a property has income from rent, that income is often used to determine the market value of the property. There is a known return on investment. If the property does not have income, the market price is formed by looking at the sale price of other similar properties and by the needs of individual buyers. This estimation of price is less certain. Predictable return has great appeal for estimating value.
5. Stocks that pay dividends may also increase in share value. The share price of a stock that pays dividends is reduced by the amount of the dividend when the dividend is paid. However, the share price may benefit from increased demand for ownership by investors, just like a growth stock, since dividends are only part of the share value. However, for any stock, there is always market risk and no guarantee of investment results.
The payment of dividends represents the success of a business in the marketplace. Why not align yourself with proven winners?
Howard Feigenbaum is Registered Principal and Owner of Sharemaster, a Broker-Dealer firm that specializes in monthly dividend income funds.
"Do you know the only thing that gives me pleasure? It's to see my dividends coming in." - John D. Rockefeller
This article is a general discussion of the subject and is not intended as a solicitation or specific investment advice.
Copyright 2011 Sharemaster
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