Several eminent economists believe that without a concrete budget plan or legislative strategy, President Donald Trump's pro-growth agenda could turn out to be what Silicon Valley calls "vaporware," or promises without a product.
The tepid pace of growth of the U.S. economy in the fourth quarter, coupled with stretched valuations are making bulls skittish and giving hopes to bears. In such uncertain times, income-seeking investors should look for funds that are exposed to stocks providing handsome dividends.
Trump's Impractical Budget
In his speech to the Congress, Trump assured that he will keep the several campaign promises made to voters. However, the President's pro-growth agenda is already in troubled waters on grounds of being inconsistent and impractical.
Hints of lower tax rates along with relaxed regulations have helped the stock markets soar. Yet, his lofty promises are a long way from being delivered on. Trump had pledged to construct a wall on the Mexico border, invest $1 trillion in infrastructure and provide better health insurance at low prices, all without trimming social security or Medicare. In fact, budgeteers from both the Republican and Democrat parties said that fulfilling such promises is next to impossible, while arithmetically it simply doesn't add up. Republican leaders in the Congress believe that Trump can't balance the budget without opting for deficit spending.
Trump's willingness to hike defense spending by almost 10% by exacting deep cuts from the State Department and the Environmental Protection Agency (EPA) has also raised eyebrows. The math simply doesn't work here either. The combined budget of State and EPA comes to around $67 billion, so extracting about $54 billion, as promised, looks impractical. When White House officials added that they will target foreign aid to boost defense spending, indicating a politically popular target, some leading Republicans were at a loss.
Lackluster Economic Growth, Stretched Valuations
The much-anticipated congressional address by Trump followed the slightly disappointing GDP figures. The economy expanded at a seasonally adjusted rate of 1.9% in the fourth quarter, and was lower than the consensus estimate of 2.1%. In the previous quarter, however, GDP rose a substantial 3.5%. Analysts were all the more disappointed by the fourth-quarter statistics, as in the first half of last year, the economy grew a meager 1.1%, raising hopes that the fourth quarter would follow the trend as the third.
From a valuation perspective, the U.S. stock market is looking pretty expensive. Trump's commitment to introduce market-friendly policies pushed the major indices to all-time high levels. Thanks to such enthusiasm, the forward price-to-earnings ratio on the S&P 500 is hovering around its highest level since 2004, and it won't be long before the markets face a correction.
Top 5 Dividend Mutual Funds to Buy Now
Trump's promised policies without details, lackluster economic growth and an overvalued market may lead to uncertainty in the near future. At this juncture, income-focused investors should turn toward mutual funds exposed to dividend-paying stocks that provide the regular cash they are seeking.
We have selected five 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 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.
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 1.51%. The fund's 3-year and 5-year annualized returns are 8.5% and 11.8%, respectively. The annual expense ratio of 0.61% is lower than the category average of 1.01%. FDGFX has a Zacks Mutual Fund Rank #1.
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. Its year-to-date dividend yield is 1.45%. The fund's 3-year and 5-year annualized returns are 10.8% and 13.6%, respectively. The annual expense ratio of 0.64% is lower than the category average of 1.01%. PRDGX has a Zacks Mutual Fund Rank #2.
Fidelity Advisor Dividend Growth Fund A (MUTF:FADAX) invests primarily in companies that pay dividends or that the advisor believes have the potential to pay dividends in the future. It invests in domestic and foreign issuers. The fund invests in either "growth" stocks or "value" stocks or both. FADAX's year-to-date dividend yield is 1.12%. The 3-year and 5-year annualized returns are 8.1% and 11.4%, respectively. Its annual expense ratio of 0.9% is below the category average of 1.01%. FADAX has a Zacks Mutual Fund Rank #2.
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 2.68%. VHDYX's 3-year and 5-year annualized returns are 11.9% and 14.1%, respectively. Its annual expense ratio of 0.15% is lower than the category average of 1.07%. It has a Zacks Mutual Fund Rank #1.
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. The fund's year-to-date dividend yield is 1.9%. Its 3-year and 5-year annualized returns are 9.2% and 11.9%, respectively. The annual expense ratio of 0.19% is below the category average of 1.01%. VDAIX has a Zacks Mutual Fund Rank #1.