The Dividend-Fund Dilemma - By Jason Zweig
Sooner or later, the markets always punish investors who do the right thing for the wrong reason.
Some investors in dividend-oriented stock funds might end up learning that lesson the hard way.
So far this year, $9 billion has gone into mutual funds and exchange-traded funds that focus on U.S. stocks that pay stable, high or rising dividends, estimates EPFR Global, which tracks where investors are moving their money.
All other U.S. stock funds combined have had a net outflow of $7.3 billion.
Many of the investors joining the dividend stampede appear to be motivated by the low interest rates mandated by the Federal Reserve, which have led to a yield famine among traditional income investments like bonds, certificates of deposit and money-market funds.
Others might just be chasing past performance. The 100 highest-yielding stocks in the Standard & Poor's 500-stock index outperformed the overall market by an average of eight percentage points last year, according to Birinyi Associates.
Think twice before you jump on the bandwagon. While dividend-oriented funds are a perfectly legitimate way to invest in stocks, you shouldn't mistake them for bonds.
Nor, popular belief to the contrary, are they much safer than the stock market as a whole. And they could suddenly go from being tax-friendly to painfully taxable.
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