The stock market started off on weak note in 2016, with erratic share price movements irking investors, especially in January and February. After gaining some stability, the markets were quite a snoozer until the election. The stocks, however, ended the year strongly on expectations that there may be more business-friendly developments in Washington, with President-elect Donald Trump's policies propelling growth as well as inflation.
His plans to cut corporate taxes, reduce costly business regulations and spend heavily on rebuilding aging U.S. infrastructure are viewed as major positives for U.S. companies. However, of late, there have been indications of harsher trade policies from the Trump camp, which might eventually jeopardize the bullish sentiment. Needless to say, Trump's market-friendly policies is turning the broader market into one giant bubble, raising possibilities of disenchantment for investors in the near term. Moreover, last year has been the most volatile in the recent past, with historic elections not only in the U.S. but also in Britain and Italy. Given such widespread uncertainty, income-seeking investors should look for funds that are exposed to stocks providing handsome dividends.
Trade Policy May Hit Stocks, Valuation Risk
By naming China hawk Peter Navarro as head of a newly formed White House National Trade Council, the Trump administration has clearly indicated that the plan of imposing tax on imports is on track. Navarro, along with Trump's pick for commerce secretary, Wilbur Ross, favor border adjustment tax that is also included in House Speaker Paul Ryan's "Better Way" tax reform blueprint.
If such a tax gets implemented, economists at Deutsche Bank AG (NYSE:DB) estimate that inflation will cross the Fed's desired target level of 2% and push the dollar up by about 15%. This, in turn, will result in negative earnings revision for the S&P 500 (NYSEARCA:SPY) and will be a deterrent to economic growth. Meanwhile, the ICE dollar index touched levels last seen in 2002 on January 3 after stronger-than-expected manufacturing data added to the buck's uptrend. A stronger dollar hammers profits at U.S. multinationals as prices of goods and services escalate.
Trump's market-friendly policies also helped major indices scale to record highs. However, this has made stocks substantially pricier from a valuation perspective. This warns us that the markets might be approaching the overbought region, which will be corrected either by going sideways or lower.
From a geopolitical perspective, the election of Trump as U.S. president has intensified anxieties, with the outspoken real estate mogul planning to "greatly strengthen and expand" the country's nuclear capabilities, raising the possibility of a Cold War era-style arms race. His tweets on potentially massive changes to U.S. policy on China also raise uncertainty for the economy. Apart from the possible Trump move, economic growth in China also remains uncertain.
The impact of the fallout of U.K from the European Union (EU), the historic election in Italy and other populist movements in Europe on the broader markets is also unknown. There is possibility of a "Nexit" - Netherlands leaving the eurozone - as well. Opting out of the EU will benefit the Dutch in a number of ways, including relaxed regulations and reduced spending on immigrants.
Top 5 Dividend Mutual Funds to Buy Now
Thanks to the aforementioned factors, this year is certainly cast into uncertainty, which calls for investing in dividend-paying mutual funds. Companies that pay consistent dividends put a ceiling on economic uncertainty. These companies have steady cash flows and are mostly financially stable and mature companies, which help their stock prices to increase gradually over a period of time. Moreover, dividends are less taxed as compared to interest income, which helps your portfolio grow at a compounded rate and offer protection against earnings manipulation.
We have selected five mutual funds that offer a promising year-to-date 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 should investors 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.
Vanguard Dividend Appreciation Index Fund Inv (MUTF:VDAIX) seeks to track the performance of a benchmark index that measures the investment return of common stocks of companies that have a record of increasing dividends over time. Its year-to-date dividend yield is 1.94%. The fund's 3-year and 5-year annualized returns are 6.5% and 11.6%, respectively. Its annual expense ratio of 0.19% is lower than the category average of 1.01%. VDAIX has a Zacks Mutual Fund Rank #1.
Vanguard High Dividend Yield Index Fund Inv (MUTF:VHDYX) employs an indexing investment approach designed to track the performance of the FTSE High Dividend Yield Index. The fund's year-to-date dividend yield is 2.83%. Its 3-year and 5-year annualized returns are 10% and 14.2%, respectively. The annual expense ratio of 0.16% is lower than the category average of 1.07%. VHDYX has a Zacks Mutual Fund Rank #1.
Fidelity Strategic Dividend & Income Fund No Load (MUTF:FSDIX) invests the fund's assets with a focus on equity securities that pay current dividends. FSDIX's year-to-date dividend yield is 2.57%. The fund's 3-year and 5-year annualized returns are 8.1% and 11.3%, respectively. Its annual expense ratio of 0.75% is below the category average of 0.87%. FSDIX has a Zacks Mutual Fund Rank #2.
Fidelity Dividend Growth Fund No Load (MUTF:FDGFX) invests primarily in companies that pay dividends or those that Fidelity Management & Research Company believes have the potential to pay dividends in the future. Its year-to-date dividend yield is 1.47%. The fund's 3-year and 5-year annualized returns are 6.4% and 13.4%, respectively. Its annual expense ratio of 0.61% is lower than the category average of 1.01%. FDGFX has a Zacks Mutual Fund Rank #2.
T. Rowe Price Dividend Growth Fund No Load (MUTF:PRDGX) invests at least 65% of its total assets in dividend-paying common stocks that have favorable prospects for increasing dividends and long-term appreciation. PRDGX's year-to-date dividend yield is 1.19%. The fund's 3-year and 5-year annualized returns are 8.8% and 13.9%, respectively. The annual expense ratio of 0.64% is lower than the category average of 1.01%. It has a Zacks Mutual Fund Rank #1.