7 smart mutual funds for income investing

These funds offer management and strategy rather than following a specific index.

  • By Jeff Reeves,
  • U.S. News & World Report
  • – 05/23/2019
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Many investors turn to bonds and dividend stocks as their first destination for income. However, picking individual stocks can be daunting and building a diversified bond portfolio is not much easier. It's important to research each company, as well as keep monitor diversification and other goals. One way to build a diversified income portfolio in a hurry is to rely on tried and true mutual funds. While a bit more expensive than popular exchange-traded funds, or ETFs, many investors use mutual funds to access the best money managers and more sophisticated strategies. If you're looking for interesting income options but don't want to build a portfolio from scratch, consider these seven mutual funds.

Pimco Total Return

One of the biggest names in fixed-income investing, Pimco's Total Return fund (PTTAX) is an icon among investors seeking regular paydays from their assets. This "unconstrained" bond fund eschews the limited focus of a bond index and instead simply goes where there is opportunity. As an active mutual fund, that can come with risks if the managers move into certain segments of the bond market that don't do well. However, the flexibility tends to pay off in the long-run as PTTAX can avoid the regions or maturities that are creating obvious troubles for investors. This is a prime example if you want to look beyond a rigid index fund.

Current yield: 2.8%

Fidelity Capital & Income Fund (FAGIX)

With $11 billion in assets under management, the Fidelity Capital and Income Fund (FAGIX) is a popular destination for those seeking bigger paydays from their bond portfolio. This high-yield fund focuses on “junk” bonds from corporations that have a slightly less attractive borrowing profile, which allows bondholders to draw a higher interest rate. Currently, roughly 15% of the portfolio is allocated to energy companies, which has its risks if oil prices roll over. There's also a relatively large position in bonds for Chinese tech giant Alibaba Group Holding (BABA). There's the chance these bets don't pan out, of course, but with higher uncertainty comes higher reward.

Current yield: 4.3%

Vanguard Equity Income Fund Investor Shares (VEIPX)

Another flagship income fund, the $35 billion VEIPX is a go-to choice for investors seeking a diversified group of dividend stocks through a mutual fund. This Vanguard offering includes the biggest names on Wall Street you're sure to recognize, including banks like JPMorgan Chase & Co. (JPM) and health care giant Johnson & Johnson (JNJ). There's no such thing as a sure thing in investing, but these entrenched large-cap stocks are highly unlikely to disappear anytime soon. That means a measure of reliability as well as income for your portfolio.

Current yield: 2.8%

T. Rowe Price Dividend Growth Fund (PRDGX)

Though on the surface the yield of this T. Rowe mutual fund isn't nearly as impressive as the other funds on this list, it's important to remember that the focus is on future dividends and not present payouts. The fund's strategy is to focus only on stocks with a strong track record of paying dividends or that are expected to increase their dividends materially over time. Think of stocks like Microsoft Corp. (MSFT), which has seen its dividend soar from 13 cents in 2009 to 43 cents per quarter at present – an amazing 230% increase in dividends in just 10 years.

Current yield: 1.6%

Vanguard International High Dividend Yield Index Fund (VIHIX)

If you're less interested in dividend growth and most interested in higher yield, this Vanguard fund uses an international approach to seek out significant income potential. With stocks like European consumer giant Unilever (UL) and Asian tech stock Taiwan Semiconductor Manufacturing Co. (TSM), this mutual fund has a good mix of both developed and emerging-market stocks. This fund has zero bond holdings, so you're getting a bit more volatility. However, for investors looking to grow their nest egg as well as focusing on consistent income, this is an interesting way to split the difference.

Current yield: 3.8%

Fidelity Strategic Dividend & Income Fund (FSDIX)

Another multi-asset mutual fund that seeks high-yield stocks and bonds is the FSDIX fund from Fidelity. This is a great one-stop shop for income for a bunch of reasons, including the fact that it wins a five-star rating from Morningstar and boasts a respectable $4.8 billion in total assets under management in addition to a diversified strategy. Right now, the fund is about 60 percent in U.S. stocks as its primary focus. However, with the ability to delve deep into bonds – or even to go to cash if the managers see trouble on the horizon – this strategic fund is a great choice for income investors.

Current yield: 2.8%

Pioneer Multi-Asset Income Fund (PMAIX)

Loaded up with high-yield dividend stocks as well as bonds, this Pioneer mutual fund has top equity investments you'd expect like telecom giant AT&T (T) alongside high-yield bonds from many similar companies as FAGIX. There's also a heavy bias toward the energy sector here – more than 25% of the portfolio. There's also an international flavor, too. The top position currently is Royal Dutch Shell (RDS/A), with French energy giant Total (TOT) not far behind.

Current yield: 5.4%

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