Financial Literacy

The Worst Dividend-Paying Investment I Know

Editorial Note: Today’s the day! We kicked off the 17th Annual Investment U Conference early this morning with a presentation by The Oxford Club’s Chief Investment Strategist, Alexander Green. Our goal over the next several days? To determine if America is truly on the verge of a new Golden Age for investors. We’ll include a brief wrap-up of today’s proceedings in tomorrow’s issue. But in the meantime, you can follow along with what’s happening on Investment U’s Twitter feed here.

As I’m sure you know by now, I am a strong believer in investing in dividend-paying companies. Particularly those that I call Perpetual Dividend Raisers – companies that raise their dividend every year.

These stocks are the centerpiece of my 10-11-12 System, which is designed to generate 11% yields and 12% average annual total returns over the long term.

Lots of investors like the idea of receiving a dividend increase every year, but some are hesitant to pick the stocks themselves. I’m often asked if I could recommend any mutual funds that invest in Perpetual Dividend Raisers.

The answer is a resounding NO. For several reasons…

  1. Lack of dividend growth: The key to my 10-11-12 System, which is featured in my book Get Rich With Dividends and in The Oxford Income Letter, is investing in companies that raise the dividend every year. Most mutual funds and ETFs that invest in these kinds of stocks do not raise the dividend themselves every year. Therefore, they won’t help us achieve our goals.
  2. Lack of yield: Don’t be fooled by the marketers of mutual funds. Just because a fund has the word “dividend” or “yield” in its name doesn’t guarantee a juicy payout. According to Morningstar, 54% of funds with “dividend” or “income” in the name have yields below that of the S&P 500. The current yield of the S&P 500 is just 1.9%, so that means more than half of the mutual funds that market themselves as income funds pay less than that amount.
  3. Fees: When you own a mutual fund, you pay fees. An index fund may have only a 0.2% annual expense ratio but, as Barron’s recently noted, dividend-themed funds charge an average annual expense ratio of 1.1%. Considering you’d be very lucky to get a 4% yield out of any mutual fund, paying 1.1% in expenses eats up a good chunk of your yield.

Have you ever heard of the Dividend Plus Income Fund (Nasdaq: DIVPX)? You might be surprised to learn that it currently has a yield of zero. That’s right. Zero. The fund that bills itself as the “Dividend Plus Income Fund” did not pay out a dividend in 2014 or 2013. In 2011 and 2012, it paid shareholders a penny per share and a half penny per share respectively. And it charges 1.24% per year in expenses.

JPMorgan Equity Income A (Nasdaq: OIEIX) pays a 1.72% yield and comes with a 1.04% expense ratio. Oh, and it will cost you a 5.25% load to get in, which eats up three years’ worth of yield. Where do I sign up?!

Even Vanguard Equity Income (Nasdaq: VEIPX), which sports an ultra-low expense ratio of 0.29%, pays only a 2.59% yield. And while 2.59% isn’t horrible in today’s low-yield environment, it still won’t get you to where you want to go.


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That’s why I always suggest skipping the mutual funds and ETFs and buying a portfolio of 10 or more Perpetual Dividend Raisers. This way, you can ensure that you’re getting at least a 4% yield on the whole portfolio and, importantly, that the yield will go higher every year.

Investing this way, here’s how you can specifically combat all of the problems mentioned above…

  1. Dividend growth: You can easily design a portfolio filled with stocks like Meredith Corp. (NYSE: MDP), which has raised its dividend an average of 13% per year over the past 10 years.
  2. Yield: Though they’re harder to find these days, there are still plenty of stocks that yield 4% or higher. Mercury General Corp. (NYSE: MCY) currently yields 4.5% and has raised its dividend every year for 28 years.
  3. Fees: If you buy your stocks with an online broker, it will cost you about $10 per trade. If you buy 10 stocks and hold them for five years, your total one-time cost will be $100. On a $10,000 portfolio, even the low annual fees of Vanguard’s funds will cost you more.

Investing in a portfolio of Perpetual Dividend Raisers will generate a solid yield for you today and a better one tomorrow. Mutual funds – even those that claim to specialize in dividend payers – will not. Stay away from them.

Good investing,


P.S. If you want to learn more about my strategy and Get Rich With Dividends, you can get it for 30% off today. But act quickly. My publisher just told me they have to do another print run because inventories were running low at Amazon and other bookstores. Order your copy today.


A master of the steady, reliable science of income investing, Marc’s commentary has appeared in The Wall Street Journal, Barron’s and U.S. News & World Report. He has also appeared on CNBC, Fox Business and Yahoo Finance. His book Get Rich With Dividends: A Proven System for Double-Digit Returns achieved best-seller status shortly after its release in 2012. He captures the hearts and minds of readers approaching their golden years in his daily e-letter, Wealthy Retirement.


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