After the market turmoil of the past two or three years (depending on where you live on this planet), trying to get a head start lead on future growth opportunities has never been more difficult. With credit remaining tight for smaller companies, the advice of the past where advisors insisted on pouring thousands into small-cap funds or individual companies may not be such a wise recommendation. In fact, even large cap companies have seen their credit ratings cut and, as a consequence, are paying higher rates on their bonds and other debt, a harsh reality that cuts deep into bottom-line profitability.
In fact, there has been such a monumental shift in the way that corporate American lends money that what was formerly considered higher rates based on higher risk is now the only rate out there… and that higher rate is only available for the strongest companies.
But if an investor has little or no faith in the fixed-income asset class (or more likely, little understanding of the class) and prefers to steer toward the equity class, where should they turn?
One recommendation that is sure to be popular is the Dividend Growth class. Such funds will invest in dividend-paying companies. What makes this area a potentially hot investment in the coming years is that Dividend funds will invest only in companies that pay dividends. When companies cut or drop their dividend payments, they are essentially sold off, sending the stock price down real low real fast. So it makes great sense why companies will exhaust all options before making the dreaded announcement that dividends are being cut or eliminated altogether. Just look at how GE’s stock price reacted after it announced a temporary reduction in its dividend back in 2008/2009!
Most convincing is the fact that Dividend funds incorporate a fair amount of conservative investments (only the strongest companies pay dividends) while simultaneously ensure that the investments are safe. The dividends also serve a great benefit to the fund managers: it helps reduce the amount of growth needed in order to meet or exceed benchmark returns. For example, a dividend fund paying 2.5% will only need to achieve growth of 7.5% to match a benchmark return of 10% (not including fees). In the end, this means less risk for the investor.
Since most benchmarks will consist of dividend-paying securities to begin with, Dividend Funds which hold dividend-paying securities exclusively will stand to benefit financially over the coming years. The reason for this that unlike the past where small-cap companies led recoveries, mid- to large-cap securities will be the leaders now. Why? Because small-cap companies are unable to affordably obtain the credit they need. Larger companies, on the other hand, can obtain credit, albeit at a higher cost than they are used to. Where Dividend securities stand to gain even further is in their ability and commitment to paying dividends. Not only will investors benefit from the stronger quality of securities in a Dividend fund, but will enjoy the steady stream of income that dividend-paying securities offer.
–>Learn More About Top Dividend Funds at MutualFundSite.org.
With more than 16 years of financial services experience, Chris is the Fund Advisor for the Mutual Fund Site. He remains bullish about Dividend Funds. He provides additional information for people looking for ways to Invest 10,000 in their portfolio.
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