Inflation has finally started showing signs of cooling as both the consumer price index (CPI) and the producer price index (PPI) came up with impressive readings in June. CPI rose 3% in June on a year-over-year basis, after jumping 4% in May. This is also the lowest level since March 2021, indicating that inflation has indeed eased a lot from the past year.

Month over month, CPI increased just 0.2%. The Labor Bureau said that PPI in June increased just 0.1%.

Markets have been on a high since then, with all three major indexes expected to end the month higher. Inflation is showing a gradual decline, primarily driven by decreasing prices in categories such as gasoline, airline fares, used cars and groceries.

However, it is still elevated and a lot higher than the Fed’s target level of 2%. The Fed thus remains hawkish and has indicated at least two more interest rate hikes of 25 basis points each this year.

At the same time, slowing inflation has raised hopes among market participants that the Fed might finally end its monetary tightening cycle and settle for just one more interest rate hike.

Investors have since been trying to gauge the Fed’s future course of action, which has time and again, seen stocks scrambling for direction. The Fed halted its interest rate hikes for the first time in June after 10 consecutive hikes of 500 basis points since March 2022.

If the Fed continues with its aggressive interest rates, it will further slow the economy and cool the labor market, which so far has been resilient. While the economy remains robust, several economists have expressed concerns that additional rate hikes could push the economy into a recession.

Given this critical situation, investors seeking regular income and portfolio diversification may consider investing in dividend-paying mutual funds.

3 Best Choices

We have selected three mutual funds that provide a stable income stream and help mitigate potential risks associated with economic uncertainties. The funds carry either a Zacks Mutual Fund Rank #1 (Strong Buy) or 2 (Buy) and are poised to gain from the above factors. Moreover, these funds have encouraging three and five-year returns. Additionally, the minimum initial investment is within $5000.

We expect these funds to outperform their peers in the future. Remember, the goal of the Zacks Mutual Fund Rank is to guide investors in identifying potential winners and losers. Unlike most fund-rating systems, the Zacks Mutual Fund Rank is not just focused on past performance but also the likely future success of the fund.

The question here is: why should investors consider mutual funds? Reduced transaction costs and diversification of portfolio without several commission charges that are associated with stock purchases are primarily why one should be parking money in mutual funds (read more: Mutual Funds: Advantages, Disadvantages, and How They Make Investors Money).

Shelton Equity Income Fund (EQTIX Quick QuoteEQTIX - Free Report) invests the majority of its assets, along with borrowings, if any, in common stocks of domestic companies that payout relatively higher dividends within the industry and have the potential for capital appreciation. EQTIX advisors choose to invest in equity securities of medium and large-cap companies.

EQTIX’s dividend yield is 7.7%. The fund’s 3-year and 5-year annualized returns are 11.8% and 7.9%, respectively. The annual expense ratio of 0.71% is lower than the category average of 1.11%. EQTIX has a Zacks Mutual Fund Rank #1. 

Virtus Seix Floating Rate High Income Fund Class A (SFRAX Quick QuoteSFRAX - Free Report) seeks to provide as high a level of total return as is consistent with the relative stability of capital through the purchase of investment-grade debt securities. SFRAX invests at least 80% of its assets in investment-grade municipal bonds with maturities of more than one year and whose interest is exempt from federal income tax. 

SFRAX’s dividend yield is 7.1%. The fund’s 3-year and 5-year annualized returns are 5.3% and 2.7%, respectively. The annual expense ratio of 0.94% is lower than the category average of 1.03%. SFRAX has a Zacks Mutual Fund Rank #2. 

Nuveen Floating Rate Income Fund (NFRAX Quick QuoteNFRAX - Free Report) invests most of its assets along with borrowings, if any, in floating-rate securities. NFRAX advisors consider investing in floating-rate loans, other floating-rate debt securities, including corporate debt securities and U.S. government securities, money market securities and shares of money market and short-term bond funds.

NFRAX’s dividend yield is 6.8%. The fund’s 3-year and 5-year annualized returns are 5.9% and 3.1%, respectively. Nuveen Floating Rate Income Fund has a Zacks Mutual Fund Rank #2. 

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