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Searching for Great Dividend Funds by Morningstar.

Morningstar did a 19-page paper that investigated the nature and the performance of the dividend-like funds in Morningstar Direct.

If you are a curious investor with a strong affinity towards dividend investing, this paper should intrigue you.

I will go through some of the parts that I took notice of, and if it interests you, then you can read the full report. There are probably 348 US-domiciled dividend funds which held just over USD 1 trillion investors’ money.

More Money Shifted to Passive Dividend Investing

Just like the general fund trend, money has gradually shifted to more index-tracking dividend funds.

3 Different Types of Dividend Funds

Whenever someone tell me that they like or they practice dividend investing, I always wonder what kind of style they lean closer to. Not all of them are the same.

Morningstar classifies the dividend funds into three different cohorts:

  1. Dividend Income – Those that focus heavily on income.
  2. Dividend Growth – Hold stocks that consistently increase their dividends over time, thus signalling overall resilience and future growth.
  3. Balanced Income & Growth – Strike a balance between future growth and current income.

I lean closer towards the dividend growth philosophy because it is a more codified way of investing in more quality companies.

You can also read this data-driven article about dividend growth: If You Invest in a Portfolio of Longterm Dividend Growers, Did You Beat the Index?

Here are some bullet point differences.

Dividend Income:

  1. Higher yields than the market.
  2. Growth of their dividend payments at a slower rate.
  3. Mature companies with limited growth opportunities
  4. Or areas which face deteriorating business conditions.
  5. Larger payouts.

Dividend Growth:

  1. Less exposure to dividend cuts.
  2. Lower current yields
  3. Higher future payouts.
  4. Favor stocks with durable competitive advantages.
  5. Long histories of dividend growth.
  6. Strong profitability.
  7. Trade at higher price multiples, which reflect better outlooks but also raising the hurdle for future returns.

How dividend fund cohorts are different from each other.

Pure dividend income funds tend to have a higher dividend yield today. In terms of the average profitability as judged by return on invested capital (ROIC), the dividend growth funds are higher.

The dividend growth funds also have the highest dividend growth rate.

They also happen to have the most funds that are ranked as having wide moats.

How They Compare Based on the Total Returns and Drawdown.

The table below shows how the returns are like for these three groups of funds against the Vanguard Total Stock Market ETF:

For five year periods, the dividend growth funds tend to have the highest total return (capital gain + dividend income) to the Vanguard Total Stock Market ETF.

That, despite having roughly the same volatility profile as the dividend income and dividend income & growth type of funds.

The Passive US Domiciled Dividend Funds in Each Type

The report also gathered some of the better passive dividend funds:

Now, you may have some names to work with.

The Gold rated funds tend to have low expense ratios and low turnover of stocks.

Read the Report Here

You can read the Morningstar report here: Searching for Great Dividend Funds

If you want to trade these stocks I mentioned, you can open an account with Interactive Brokers. Interactive Brokers is the leading low-cost and efficient broker I use and trust to invest & trade my holdings in Singapore, the United States, London Stock Exchange and Hong Kong Stock Exchange. They allow you to trade stocks, ETFs, options, futures, forex, bonds and funds worldwide from a single integrated account.

You can read more about my thoughts about Interactive Brokers in this Interactive Brokers Deep Dive Series, starting with how to create & fund your Interactive Brokers account easily.


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