As a dividend investor, you shouldn’t expect a mutual fund’s return from capital appreciation to beat an index that holds growth stocks. However, you do want to see less volatility in the net asset value (NAV) and that the fund’s total return with dividend income comes close to the index.
Now that you know now to evaluate mutual funds, look for funds that meet or exceed the following criteria:
No load: The amount of money you lose to loads can significantly decrease your portfolio and its potential for capital gains.
Expense ratio below 2 percent: Expense ratio fees also eat into your capital appreciation. Make sure the dividend yield exceeds the expense ratio so that your income covers your costs and then some. That way you at least capture all the fund’s capital appreciation, even though you’re spending some of your dividends. The higher the fees, the less likely the returns you receive from the fund will actually beat the market.
Fund’s 12-month yield exceeds the 12-month yield of the benchmark index: If the fund’s 12-month yield doesn’t beat the index, you’re better off buying the index fund. From December 1936 through March 2009, the average yield for the S&P 500 Index was 3.814 percent. At the end of 2009, the S&P 500’s 12-month dividend yield was 2.01 percent versus the 3.14 percent yield for December 2008. The yield is based on the cash dividends paid over the prior four quarters and the closing quarterly price.
Minimum returns: Remember that share prices fluctuate, so dividend investors are willing to give up big gains in capital appreciation in return for steady dividend payouts higher than the benchmark index’s yield. Don’t be afraid to look at funds with a total return that is 1 or 2 percentage points lower than the index.
Established: Don’t buy new funds. You want a fund with a track record — the longer the better. You want to be able to see how the fund performs in a variety of market conditions. Be wary of anything with less than a three-year record. If you know an experienced manager who is starting her own fund, you may invest a little bit, but consider this investment very risky until she builds a record.
Five-year-plus history of consistently increasing dividend payments: After all the other criteria, this one really boils it all down. Plenty of no-load funds have decent yields, but as with dividend stocks, you want your dividends to grow. A five-year record shows that the manager knows how to consistently pick stocks that have growing dividends.
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Source:http://www.dummies.com/how-to/content/how-to-spot-a-profitable-mutual-fund.html
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