Are you feeling overwhelmed with starting your investment portfolio, and not sure how to choose between Mutual Funds vs Dividend Stocks? Let’s look at each to help you decide what works best for your investing goals.
With so many investment options available it’s easy to be unsure of where to start. You will need to decide which types of investments you want to include in your portfolio in addition to setting your investing goals and risk tolerance.
In the beginning you may not feel confident enough to buy individual stocks. It feels too risky, like you’ll make a mistake. My first few dividend stock purchases didn’t work out as expected.
While mutual funds may feel easier and safer to buy, are they actually better than dividend stocks? Let’s take a closer look at both types of investments to help you decide which you want to hold in your portfolio.
One quick note before continuing. I’m not a financial planning professional. Always do your own research and consider your own circumstances before making any financial decisions. I’m sharing what’s working for me to help you figure out what to consider next. Or check with your favorite financial professional to help you decide what works best for you.
What are mutual funds
Mutual funds are professionally managed portfolios of investments with guiding rules to determine:
- the types of companies and industries to include in the portfolio,
- the types of investments to hold (stocks, bonds, other funds, etc),
- when to buy new investments, and
- when to sell those investments.
A mutual fund may focus on companies of a certain size or within a specific industry category. Triggers to buy or sell may be based on a percent gain or loss in value.
The money in the portfolio is made up of money from different investors. Mutual funds can give smaller investors, such as us, access to professionally managed portfolios and sometimes investments we could not buy on our own.
The professional management of the fund has staff actively watching the portfolio, doing research, and making decisions based on the fund guidelines and current market conditions.
What are dividend stocks
Dividend stocks are stocks from individual companies where the company pays out (usually quarterly) a portion of its profits (or reservers) to the shareholders.
By directly holding stock in companies you have control over what you buy and sell. This can be seen as more risky because you rely on your own research to guide your decisions. Typically you’ll own stock in fewer companies than a diversified mutual fund.
3 tips for considering Mutual Funds vs Dividend Stocks
Mutual funds and dividend stocks are two different types of investments you could hold in your portfolio. And some mutual funds can include dividend stocks in their portfolios. In looking at the three following tips, it will help you consider if you want to directly buy dividend stocks or potentially buy mutual funds containing the same stocks.
Mutual funds have management expenses compared to one-time dividend stock purchase commissions
There are expenses in running a mutual fund. Unless there are account fees, you usually won’t pay any of these fees directly. The expenses can affect the price or capital gains you receive each year. In a highly volatile market year, you might receive a lower amount of dividend or capital gain distributions compared to the previous year.
With long term dividend investing, you usually only pay the initial purchase commission and dividend reinvestment is done without any additional changes. Double check with your brokerage company to confirm any account fees.
Mutual funds may distribute capital gains annually
During the year, certain rules within the mutual fund strategy may trigger the sale shares from the portfolio. The capital gains from the transactions may be distributed out the fund participants (you). If you have the mutual fund in a taxable account, you may need to pay taxes on the income.
With dividend stocks, you would only have capital gains from your shares if you sell them. And similar to mutual funds, taxes on the income may need to be paid if the trade happened in a non-retirement account.
As with all tax questions, double check with your favorite tax professional or the IRS to confirm what applies to your specific situation.
Mutual funds may give you access to special types of investments
In addition to holding stocks, the mutual fund portfolio may also include bonds and other types of investments that are not easily accessible to the regular investor.
A mutual fund focusing on municipal bonds package a tax-exempt offering into a single investment purchase. Corporate bond funds are another type specialized mutual fund that exists.
As a dividend investor, which is better to hold individual stocks vs mutual funds?
You will ultimately need to decide which makes more sense for your portfolio, investment goals, and risk tolerance.
For mutual funds that pay dividends it’s generally not possible to estimate how much you’ll receive each dividend payment. You own shares in the mutual fund, not the specific companies. And in a volatile year, the returns may not be as high as the previous year.
Bond funds may be the exception. The distribution rates may change month to month, but you can get close to estimating the dividends you’ll likely be paid.
With stocks you can lookup the historical dividends as well as future announced payments to estimate how much you might receive based on the shares you hold. Of course the only guarantied dividend is the one that’s been paid.
While there is nothing wrong with holding mutual funds, as a dividend investor directly holding dividend stocks would give you more control over your portfolio compared to most mutual funds.
Wrapping up. Do you prefer mutual funds vs dividend stocks?
If you’re aiming to be a dividend investor with a planning to grow a dividend portfolio for monthly income, take a look at buying dividend stocks vs mutual funds. With direct stock holdings you can estimate your annual dividends and potentially have lower fees.
To help you get started with researching stocks to buy, check out the holdings of the mutual funds for ideas. I improved my confidence in choosing stocks based on using several mutual funds for hints. If the mutual fund could hold those shares, why couldn’t I?
With each purchase you’ll make decisions based on the information you have at the time, learning more as you go.
Over to you. What types of investment do you think you’ll be buying for your portfolio?
More Dividend Investing Ideas
- 6 dividend investing mistakes to avoid when you start
- How to build a monthly dividend portfolio for passive income
- Dividend Kings vs Dividend Aristocrats: Who’s on the 2019 list
- Dividend Aristocrats Payout Schedules and Patterns
- Simple Dividend Calculator Spreadsheet
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