Dividend reinvesting is a time-honored wealth-building method. It takes advantage of the stock market's inherent upward drift, individual stock appreciation, and the incredible power of compound interest.
Today's ultra-low interest rate environment makes developing a diversified, dividend-paying portfolio all the more crucial to accelerate your journey toward wealth.
However, many investors lack the capital, time or inclination to build such a portfolio from the ground up.
While far from foolproof, dividend-paying mutual funds are professionally designed and managed portfolios of dividend-yielding financial instruments. These funds can also provide investors exposure to exotic derivatives and other securities that may be difficult or impossible for retail investors to access.
Let's take a closer look at three of my favorite dividend-paying mutual funds.
1. Pimco Real Estate Real Return Strategy A (PETAX)
This fund has $3.8 billion under management and yields close to 8% annually. Its five-year average return is 30.8%, and the fund is up an astounding 25.6% year to date.
PETAX invests in derivatives of real estate investment trusts (REITs), as well as directly into REITs, stocks, convertible securities and exchange-traded funds (ETFs). The fund has an annual turnover of 81% and expenses of 1.14%, and Class A shares of the fund have a minimum investment of just $1,000.
2. Pimco Convertible A Fund (PACNX)
Another top performer from "Bond King" Bill Gross' company, PIMCO, this fund boasts a year-to-date return of over 11.5% and a five-year annual average return of 15.5%.
This fund is generally at least 80% invested in a diversified portfolio of convertible securities which may be represented by options, futures contracts and swap agreements. Investment-grade bonds and junk bonds can take up to 20% of the portfolio, and up to 30% may be allocated to securities denominated in foreign currencies. Currently, the fund has nearly a quarter of its $206.6 million in assets under management allocated to E-mini futures contracts on the S&P 500 Index.
The annual turnover of assets is high at 103%, and net operating expenses are 1.05%. Like PETAX, Class A shares of this fund also have a minimum investment of just $1,000.
3. Oppenheimer Rochester High Yield Municipal A (ORNAX)
This fund's goal is to provide tax-free income by investing in securities that are exempt from federal income taxes -- specifically, high-yield municipal bonds. With an asset base of $5.7 billion, the fund yields 7% and has gained 11.2% this year and returned an annual average of 15.5% over the past five years.
In contrast to the PIMCO funds, ORNAX has less turnover (just 18%) and a lower expense ratio, at 0.73%. However, like the PIMCO funds, ORNAX's minimum investment is $1,000.
Risks to Consider: These funds are subject to a variety of risks -- such as those associated with real estate, derivatives, currency fluctuations and leverage -- but that's part of the deal in pursuing high yields. That's not to mention the fees and costs to investors.
Action to Take --> I like all three of these mutual funds, with the Pimco Real Estate Real Return Strategy A (PETAX) my favorite. Making equal allocations to each is a three-pronged approach to building a well-diversified, dividend-earning portfolio.