During the '90s, the market ignored old-fashioned dividend-paying stocks in favor of profitless companies that were going to change the way we watch TV, buy groceries and talk on the phone. As it turns out, concepts are fleeting. Cash isn't. Now dividends are making a double-barreled comeback. For one, investors realize there's some security in receiving regular cash payments from a company. Historically, dividends have made up more than 40% of the market's total return. And they can also be proof of a company's financial stability. And now the White House wants to cut the taxes on dividends. They're currently taxed at ordinary income rates as high as 38.6%, while long-term capital gains are taxed at a rate of 20%. That higher rate could come down, or a certain amount of dividends could be excluded from taxation. But the bubble-era rejection of dividends still persists. Many companies don't pay dividends; they'd rather use cash to acquire other companies, buy back stock or develop new technologies. Cisco ( CSCO) shareholders just voted against a dividend. And the yield on ( VFINX) Vanguard's 500 index remains a paltry 1.49%. However, with investors more interested in predictable returns these days and a potential tax cut on the horizon, dividend payouts could pick up.
And some fund managers know how to dig up more dividends than others. If you need income from your investments to live on, these funds won't do. But if you want some dividends from the stock funds you own, here are two solid, cheap no-load funds run by experienced managers.
And what you're going to pay to own a fund in the future is a lot more predictable than what the returns will actually look like. The less you pay to own a fund, the more money will wind up in your wallet. This fund's rock-bottom expense ratio of 0.46% is one of the reasons its one-, three-, five- and 10-year returns rank in the top third of all large-cap value funds. Vanguard's Equity Income fund is run by three different outside managers. Newell Associates manages about half of the fund assets, with the remainder divided between Wellington Management and John A. Levin & Co. With three separate managers concentrating on their own ideas, you get a broadly diversified portfolio of more than 160 stocks, and that reduces volatility. In particular, Newell's focus on attractively priced dividend-paying stocks like Merck ( MRK) helps the fund deliver a yield of 2.51%, well above the broad market.