The Best Dividend Mutual Funds

A stock is an ownership share in a business. Since you own a piece of the business, you own a piece of the profits -- a share of the profits, proportional to your share in the business.

Your dividend payments are at the hands of the company's managers, like the CEO. Lost yet?: Exactly what kind of owner gets bossed around by management? Um, shouldn't the shareholder be in charge?

It is up to part owners, in a sense. A vote on who stays and goes. But this doesn't mean that you're getting all the dividends that you deserve. How many billions of dollars in cash is AAPL sitting on? What, exactly, is the point of this rainy day fund? If they can't figure out how to put it to work, I can.

So where was I? That dividend is a small cut of a company's profits, delivered by check to your mailbox. At least the amount that management has agreed to pay you.

This leads to my next point: mutual funds. Mutual fund? What mysterious financial instrument is this? A mutual fund is a pool of money that one (hopefully talented) person manages. Buying a share in a mutual fund is like telling a guy to run your money for. Via fund fees, you're basically hiring someone to allocate your money. If you get lucky and pick today's Peter Lynch, you could end up 40x your money.

And now we're at the point where I can actually explain what the headline even means, in such a way that makes sense: a dividend mutual fund is one that attempts to invest in high-dividend stocks.

But wait. High dividend yield stocks. Shouldn't it all be the same? 100% of the profit would go back to shareholders, right? Except it isn't like that. In practice, you're unlikely to get more than a 5% dividend yield. Hell, a great number of stocks have no dividend at all. 0% yield. They need the cashflow to grow.

In other words, a fund that holds high dividend stocks is a high dividend mutual fund. This should translate to regular, stable income, as long as these businesses remain profitable.

So what mutual fund should you be in? This is much tougher than it at first it seems. I could construct a list of possible best dividend mutual funds. (More details in this article on the best high dividend mutual funds.) Except that's not enough. You need to know which is best in the future. Nobody knows. If we could know, everyone would already have their money there, all in that fund.

One of the weird things about mutual funds (and markets) is that past performance is not indicative of future performance. Stock charts make are essentially meaningless. Who knows what way the stock will go? Up or down? It's a coin flip. Humans see patterns in patternless chaos. That's one of our brains' largest defects. We see signal even when there is just noise.

In the face of all this uncertainty, you have to pick whatever you feel is best. Even in the face of little data.