The Right Way to Jump on the Dividend Bandwagon

If you want low expenses, you go to Vanguard. The fund company is known for keeping costs down -- way down. And its (VEIPX Quote)Equity Income fund is no exception. Its expense ratio is a scant 0.46%. With those rock-bottom costs, the fund delivers a dividend yield of 2.56%. This Vanguard fund's portfolio is full of classic dividend-paying stocks, such as energy and telecom companies. And shareholders will pay less in taxes on those dividends.

The (PRFDX Quote)T. Rowe Price Equity Income fund isn't quite as cheap as the one from Vanguard. But its expenses are still well below average at 0.79%. And its yield is well above average at 1.8%, according to Morningstar. The fund owns some of the same stocks, such as ExxonMobil (XOM Quote), that you'll find in the Vanguard fund. But longtime manager Brian Rogers will also buy stocks that have been beaten up by the market, like AOL Time Warner (AOL Quote).

If you're a Fidelity fan, that firm's (FEQIX Quote)Equity Income fund is another option with a similar profile: low expenses, big-name stocks, experienced management and an attractive yield. However, this fund is by far the biggest of these three funds, sitting on more than $18 billion in assets.

If you already own plenty of large U.S. stocks, an international fund could also benefit from the lower dividend tax. The dividends from international stocks will also be taxed at the 15% rate as long as a company's stock trades here in the U.S. as well. For example, the 3% yield on GlaxoSmithKline (GSK Quote) fits the bill because the company's stock trades on the New York Stock Exchange.

By extension, some of the stocks in a fund like the (VEURX Quote)Vanguard European Stock Index fund would fall under the lower tax rate.