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Income investing that goes beyond an index.

Many investors turn to bonds and dividend stocks as their first destination for income. However, picking individual stocks can be daunting and building a diversified bond portfolio is not much easier. Its important to research each company, as well as keep monitor diversification and other goals. One way to build a diversified income portfolio in a hurry is to rely on tried and true mutual funds. While a bit more expensive than popular exchange-traded funds, or ETFs, many investors use mutual funds to access the best money managers and more sophisticated strategies. If youre looking for interesting income options but dont want to build a portfolio from scratch, consider these seven mutual funds.

Dices

Pimco Total Return (ticker: PTTAX)

One of the biggest names in fixed-income investing, Pimcos Total Return fund is an icon among investors seeking regular paydays from their assets. This unconstrained bond fund eschews the limited focus of a bond index and instead simply goes where there is opportunity. As an active mutual fund, that can come with risks if the managers move into certain segments of the bond market that dont do well. However, the flexibility tends to pay off in the long-run as PTTAX can avoid the regions or maturities that are creating obvious troubles for investors. This is a prime example if you want to look beyond a rigid index fund.

Current yield: 2.8%

Next:

Income investing that goes beyond an index.

Many investors turn to bonds and dividend stocks as their first destination for income. However, picking individual stocks can be daunting and building a diversified bond portfolio is not much easier. Its important to research each company, as well as keep monitor diversification and other goals. One way to build a diversified income portfolio in a hurry is to rely on tried and true mutual funds. While a bit more expensive than popular exchange-traded funds, or ETFs, many investors use mutual funds to access the best money managers and more sophisticated strategies. If youre looking for interesting income options but dont want to build a portfolio from scratch, consider these seven mutual funds.

Pimco Total Return (ticker: PTTAX)

One of the biggest names in fixed-income investing, Pimcos Total Return fund is an icon among investors seeking regular paydays from their assets. This unconstrained bond fund eschews the limited focus of a bond index and instead simply goes where there is opportunity. As an active mutual fund, that can come with risks if the managers move into certain segments of the bond market that dont do well. However, the flexibility tends to pay off in the long-run as PTTAX can avoid the regions or maturities that are creating obvious troubles for investors. This is a prime example if you want to look beyond a rigid index fund.

Current yield: 2.8%

Fidelity Capital & Income Fund (FAGIX)

With $11 billion in assets under management, the Fidelity Capital and Income Fund is a popular destination for those seeking bigger paydays from their bond portfolio. This high-yield fund focuses on “junk” bonds from corporations that have a slightly less attractive borrowing profile, which allows bondholders to draw a higher interest rate. Currently, roughly 15% of the portfolio is allocated to energy companies, which has its risks if oil prices roll over. Theres also a relatively large position in bonds for Chinese tech giant Alibaba Group Holding (BABA). Theres the chance these bets dont pan out, of course, but with higher uncertainty comes higher reward.

Current yield: 4.3%

Vanguard Equity Income Fund Investor Shares (VEIPX)

Another flagship income fund, the $35 billion VEIPX is a go-to choice for investors seeking a diversified group of dividend stocks through a mutual fund. This Vanguard offering includes the biggest names on Wall Street youre sure to recognize, including banks like JPMorgan Chase & Co. (JPM) and health care giant Johnson & Johnson (JNJ). Theres no such thing as a sure thing in investing, but these entrenched large-cap stocks are highly unlikely to disappear anytime soon. That means a measure of reliability as well as income for your portfolio.

Current yield: 2.8%

T. Rowe Price Dividend Growth Fund (PRDGX)

Though on the surface the yield of this T. Rowe mutual fund isnt nearly as impressive as the other funds on this list, its important to remember that the focus is on future dividends and not present payouts. The funds strategy is to focus only on stocks with a strong track record of paying dividends or that are expected to increase their dividends materially over time. Think of stocks like Microsoft Corp. (MSFT), which has seen its dividend soar from 13 cents in 2009 to 43 cents per quarter at present – an amazing 230% increase in dividends in just 10 years.

Current yield: 1.6%

Vanguard International High Dividend Yield Index Fund (VIHIX)

If youre less interested in dividend growth and most interested in higher yield, this Vanguard fund uses an international approach to seek out significant income potential. With stocks like European consumer giant Unilever (UL) and Asian tech stock Taiwan Semiconductor Manufacturing Co. (TSM), this mutual fund has a good mix of both developed and emerging-market stocks. This fund has zero bond holdings, so youre getting a bit more volatility. However, for investors looking to grow their nest egg as well as focusing on consistent income, this is an interesting way to split the difference.

Current yield: 3.8%

Pioneer Multi-Asset Income Fund (PMAIX)

Loaded up with high-yield dividend stocks as well as bonds, this Pioneer mutual fund has top equity investments youd expect like telecom giant AT&T (T) alongside high-yield bonds from many similar companies as FAGIX. Theres also a heavy bias toward the energy sector here – more than 25% of the portfolio. Theres also an international flavor, too. The top position currently is Royal Dutch Shell (RDS/A), with French energy giant Total (TOT) not far behind.

Current yield: 5.4%

Fidelity Strategic Dividend & Income Fund (FSDIX)

Another multi-asset mutual fund that seeks high-yield stocks and bonds is the FSDIX fund from Fidelity. This is a great one-stop shop for income for a bunch of reasons, including the fact that it wins a five-star rating from Morningstar and boasts a respectable $4.8 billion in total assets under management in addition to a diversified strategy. Right now, the fund is about 60 percent in U.S. stocks as its primary focus. However, with the ability to delve deep into bonds – or even to go to cash if the managers see trouble on the horizon – this strategic fund is a great choice for income investors.

Current yield: 2.8%

Top mutual funds to buy for income investors:

  • Pimco Total Return (PTTAX)
  • Fidelity Capital & Income Fund (FAGIX)
  • Vanguard Equity Income Fund Investor Shares (VEIPX)
  • T. Rowe Price Dividend Growth Fund (PRDGX)
  • Vanguard International High Dividend Yield Index Fund (VIHIX)
  • Pioneer Multi-Asset Income Fund (PMAIX)
  • Fidelity Strategic Dividend & Income Fund (FSDIX)

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