Which dividend fund is right for growth and income
Investors who want a steady flow of tax-effective income often look to dividend-paying stocks. Since dividends are paid from profits, companies must keep making money to maintain, and hopefully increase, their payouts.
Different dividend funds* have different mandates, even though the standardized investment fund classifications lump them all together. When considering funds for potential investment, or reviewing your existing portfolio, it's important to be aware of any differences.
Growth or income?
Basically, there are two broad types: dividend growth funds and dividend income funds.
Dividend growth funds tend to invest in common stocks with good records for paying dividends. These funds are aimed at investors who hope to benefit from capital gains as those stocks appreciate. In the meantime, they receive their share of the dividends the fund collects on its holdings.
Common share dividends are variable. They often rise when companies do well, but it is possible they might be reduced or even suspended, depending on business conditions.
Dividend income funds put a greater emphasis on providing steady income than on generating capital gains. While they may hold dividend-paying common shares, they also favour preferred shares and income or royalty trusts with more stable cash flows.
Outside a registered plan, the tax treatment will depend on the source of the dividend fund's distributions.
A dividend growth fund is likely to produce more capital gains, both from the fund's trading and when you redeem units. Capital gains dividends are taxed more favourably than interest income.
Dividend income funds that hold income trusts may also offer tax-effective distributions. Income trusts often generate payments in the form of tax-deferred return of capital and may "flow through" the tax benefits available to the businesses in which they invest.
Keep in mind that fund distributions may come from multiple sources and may change from year to year. Therefore, their tax treatment may change as well.
Whether you select dividend income funds, dividend growth funds, or both will depend on your specific objectives, risk tolerance, and time horizon. With professional advice, you can find the right fund or funds for your portfolio.
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