4 Top Dividend-Paying Mutual Funds To Buy In September

by: Zacks Funds

September has earned an uncanny reputation of providing low returns, with the S&P 500 (NYSEARCA:SPY) and the Dow (DOW) usually ending in the red. Also, we are into that part of the year when returns have been historically low, while stocks are overvalued. The future is also cast into uncertainty, thanks to the upcoming presidential elections.

Also, weak factory sector data have diminished chances of a rate hike. At this juncture, income-seeking investors will look for funds that are exposed to stocks providing handsome dividends. A low interest rate environment is also a boon for dividend-paying companies.

September: Historically the Worst

September is an appalling month for the U.S. stock market as far as historical data is considered. Since 1928, the S&P 500 has tanked almost 56% of the times in September, as per Bank of America Merrill Lynch data. Similarly, the month has been dismal for the Dow Jones Industrial Average. Since the blue-chip index was created, it has shown an average loss of 1.1% in September; while in all the other 11 months, the index posted an average gain of 0.8%.

Furthermore, this terrible September record is not just because of two or three horrible years. On the contrary, stocks have been persistently posting unimpressive performance in September, with the month's average turning out to be discouraging in all but one of the dozen decades since the late 1800s.

Add to this the current limited daily movements and low volumes in the broader markets, and we all know there is a correction in the cards.

Meantime, the CBOE Market Volatility Index (VIX) is trading below 20, suggesting that there is subdued fear in the market. Such a scenario implies the market is headed for a rough patch, since low volatility often precedes a sell-off.

Thanks to this bearish scenario, dividend stocks are presently quite attractive bets. This is also because companies that consistently pay dividends are in a better position to brave market downturns.

Weak Manufacturing Wanes Odds of a Rate Hike

Manufacturing activity showed a slowdown in August, ahead of the much-awaited August jobs data release. According to the Institute for Supply Management, its manufacturing index dropped to 49.4 in August from 52.6 last month. Any reading below 50 indicates contraction in manufacturing activity. In fact, the index fell below that level for the first time since February.

In the wake of this scenario, odds of a September rate hike fell to a one in four, as a risk-averse Fed is more likely to wait for further information before hiking rates. Last Friday, chances of a rate hike had risen to one in three following Fed Chair Janet Yellen's hawkish tone at the Jackson Hole economic symposium.

Diminishing chances of a rate hike led to increase in bond prices, while yields of such bonds declined. With bonds providing little yields, income-seeking investors will turn to dividend-paying stocks for reliable returns.

4 Best Dividend Mutual Funds to Buy Now

The decline in Treasury yields has made companies that have comparatively higher and stable dividend yields more attractive. On top of it, volatility in the broader markets calls for investing in such funds. Income-focused investors will now turn toward mutual funds exposed to dividend-paying stocks that provide the regular cash they are seeking.

We have selected four such mutual funds that offer promising dividend yield, have given impressive 3-year and 5-year annualized returns, boast a Zacks Mutual Fund Rank #1 (Strong Buy) or #2 (Buy), offer a minimum initial investment within $5,000 and carry a low expense ratio.

The question here is why investors should consider mutual funds. Reduced transaction costs and diversification of portfolios without the several commission charges that are associated with stock purchases are the primary reasons why one should be parking their money in mutual funds.

Fidelity Strategic Dividend & Income Fund No Load (MUTF:FSDIX) invests assets with a focus on equity securities that pay current dividends. FSDIX's dividend yield is 2.41%. The fund's 3-year and 5-year annualized returns are 10.1% and 11.68%, respectively. Its annual expense ratio of 0.75% is lower than the category average of 0.85%. FSDIX has a Zacks Mutual Fund Rank #1.

The Hartford Dividend and Growth Fund A (MUTF:IHGIX) primarily invests in a portfolio of equity securities that typically have above-average dividend yields. Its dividend yield is 1.26%. The fund's 3-year and 5-year annualized returns are 10.1% and 12.9%, respectively. The annual expense ratio of 1.02% falls below the category average of 1.11%. IHGIX has a Zacks Mutual Fund Rank #2.

Fidelity Dividend Growth Fund No Load (MUTF:FDGFX) mainly invests in companies that pay dividends or in those that Fidelity Management & Research Company believes have the potential to pay dividends in the future. FDGFX's dividend yield is 1.33%. The fund's 3-year and 5-year annualized returns are 9.9% and 12.3%, respectively. Its annual expense ratio of 0.68% is lower than the category average of 1.04%. FDGFX has a Zacks Mutual Fund Rank #2.

Franklin Rising Dividends Fund A (MUTF:FRDPX) invests a major portion of its assets in companies that have paid consistently rising dividends. Its dividend yield is 1.25%. The fund's 3-year and 5-year annualized returns are 10% and 12.6%, respectively. The annual expense ratio of 0.92% is below the category average of 1.04%. FRDPX has a Zacks Mutual Fund Rank #2.

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