Should you invest in dividend funds?
I have been going through different investment instruments lately and due to my season, meaning my not so young age, I have been looking at dividend funds.
A dividend fund is a type of mutual fund, unit investment trust fund (UITF) or exchange-traded fund (ETF) that primarily invests in fixed income instruments (bonds) and also stocks of companies that pay dividends. These funds aim to provide investors with a regular income stream in the form of dividend payments, in addition to the potential for capital appreciation.
Investing in dividend funds can be a good idea, depending on individual financial circumstances, goals and market conditions. Here are some specific considerations we should consider:
Advantages
Regular income: Dividend funds can provide a steady stream of income, which is beneficial for those seeking supplementary income, such as retirees or those planning for long-term financial stability.
Growth potential: Investing in companies that consistently pay dividends can lead to capital appreciation over time, as these companies are often financially stable and well-established.
Reinvestment opportunities: Many dividend funds offer the option to reinvest dividends, which can help compound growth over the long term.
Diversification: Dividend funds typically invest in a range of sectors, which can help mitigate risk by diversifying across different industries.
Lower volatility: Dividend-paying stocks are often less volatile compared to non-dividend-paying stocks, providing more stability during market fluctuations.
Considerations
Tax Implications: In the Philippines, dividends received from domestic corporations are generally subject to a final withholding tax of 10 percent. Dividends from foreign corporations are subject to a 20-percent tax. It’s important to understand the tax implications to evaluate the net return on investment.
Economic conditions: The performance of dividend funds can be influenced by the economic conditions in the Philippines and globally. Factors such as interest rates, inflation and political stability can impact dividend-paying companies.
Currency risk: If investing in international dividend funds, there is a risk of currency fluctuations that can affect the value of dividends received and the overall investment.
Investment horizon: Dividend funds are generally better suited for long-term investors. Assess your investment horizon to ensure it aligns with the nature of dividend investing.
Risk tolerance: Understand your risk tolerance. While dividend funds are typically less volatile, they are still subject to market risks and can fluctuate in value.
Practical steps
Research and select funds: Research various dividend funds available in the Philippines, considering their track record, management, fees and the sectors they invest in. On a personal note, I have been looking at ATRAM Global Income Fund, Sun Life Prosperity World Income Fund and some funds available offshore. I think these funds are more suited to my needs now that I am not after growth as much compared to my younger years.
Consult a financial advisor: Consulting a financial advisor can provide personalized advice based on your financial goals, risk tolerance and investment horizon. Chose a competent advisor and relationship manager who is well-versed on investments and has a record of taking good care of his/her clients.
Monitor your investments: Regularly review the performance of your dividend funds and stay informed about market conditions and any changes in the companies or sectors your funds invest in.
Investing in dividend funds can be a sound strategy, especially for those seeking regular income and long-term growth. However, it’s important to consider the tax implications, economic conditions and personal financial goals. Diversifying your portfolio and seeking professional advice can help maximize the benefits of investing in dividend funds. And finally, please do your homework well before investing and never invest in something you do not understand.
Randell Tiongson is a registered financial planner at RFP Philippines. To learn more about financial planning, attend the 109th RFP program this September 2024. Email info@rfp.ph or visit rfp.ph.
