Dividend funds are funds that primarily invest in companies that pay dividends. The dividends can be received as a source of income or reinvested, compounding over time. In a low interest rate environment funds like these can be extremely attractive for investors.
Are dividend funds for you
So far in 2017 a number of international dividend-themed exchange traded funds (ETFs) have seen heavy inflows, in some cases nearly doubling in size as income-seeking investors scour for alternatives in a time of low, global bond yields.
Matt Williams, investment strategist at BlackRock, says investors need to choose a fund based on what it is actually invested in, rather than just looking at the yield figure.
One of the reasons a stock can have a high dividend yield is a sharp decline in its price, rendering it cheap. This is why many high dividend yield stocks are also value stocks, due to their cheapness. However, not all cheap stocks represent value.
Matt urges investors to examine whether a company's dividend payout structure is sustainable and says companies might be issuing stock or selling off assets to fund dividend payments, which is not a strategy that can be carried out long-term.
It is also important to remember that dividends are taxed as ordinary income.
According to fund managers, generally, companies in banking, oil and gas, metals, and selected mid-cap capital goods offer scope for high dividend yield companies.