Risky assets including stocks are suffering from a serious case of “Brexit Blues,” which forced investors to park their money in safe-havens such as bonds. Fed Chair Janet Yellen had said that U.K’s decision to leave the EU would “usher in a period of uncertainty” and fuel volatility in world markets (read: Brexit Wins, But at what Cost to British Firms?).
As demand for bonds climbs, yields decline and term premiums are pushed lower. In this scenario, income seeking investors are lured toward funds having exposure to dividend paying stocks. On top of it, diminishing chances of a rate hike have made these funds more attractive.
Low Bond Yields
Britain’s vote to leave the EU caught markets off guard and magnified concerns about fresh bouts of volatility in the financial markets worldwide. Concerns that such an outcome will destabilize the region’s economy compelled investors to embrace relatively safe-haven assets including U.S. government debt. As investors started to buy bonds, yields plummeted to record lows (read: What is a Bond Yield?).
Thanks to Brexit induced market volatility, the 10-year Treasury yield has declined to 1.39% from 2.27% at the beginning of the year. The 30-year Treasury yield, on the other hand, plummeted to a record low of 2.098% yesterday before recovering to 2.12%.
Yields on other nations’ debt are even lower. Yields on Japanese and German debts are, in fact, negative. Yield on 20-year Japanese debt fell below zero for the first time ever on Wednesday, while yield on 10-year government debt of Germany had dipped below zero for the first time ever last month.
Term Premium Falls
Bank of Japan and the European Central Bank are buying government bonds, while the economic fallout from Brexit is expected to force the Bank of England to take a similar step to stimulate its economy. As discussed above, heavy demand for Treasuries are not only pushing yields lower but also dragging Treasury term-premiums down. The term premium on the 10-year Treasury went down from 0.07 percentage points to a record low of negative 0.71 percentage points yesterday.
So, what are term premiums? It is the excess yield that investors demand for holding a long-term bond instead of a series of shorter-term bonds. Historically, term premiums have been positive as investors fretted about being caught on the wrong foot due to higher inflation and tighter monetary policies than what they had expected. But with Brexit fears continuing to dominate the bond market, yields have fallen to historic lows (read: What We Do and Don’t Know about the Term Premium).
Buy These 4 Dividend Mutual Funds Now
The decline in treasury yields has made companies that have comparatively higher and stable dividend yields more attractive. Income-focused investors will now turn toward mutual funds exposed to such dividend paying stocks that provide the regular cash they are seeking. Meanwhile, interest rates around the world are falling even lower after U.K.’s Brexit vote. In such an environment of low interest rates across the globe including the U.S., dividend payers become more and more alluring (read: 4 Juicy Dividend Stocks for July).
If rates fall or remain low, share prices of these companies rise. This is because companies that generally have high dividend yields mostly belong to those sectors that have huge debt loads and, in a low interest rate environment, their debt servicing costs don’t go up much since they have to shell out a lower amount of interest. This in turn boosts profitability (read: Do Interest Rate Changes Affect Dividend Payers?).
We have selected four dividend paying mutual funds that offer a promising year-to-date dividend yield, have given impressive 3-year and 5-year annualized returns, boast a Zacks Mutual Fund Rank #1 (Strong Buy) or #2 (Buy), offer a minimum initial investment within $5,000 and carry a low expense ratio.
Funds have been selected over stocks, since funds reduce transaction costs for investors. Funds also diversify their portfolio without the numerous commission charges that stocks need to bear (read: The Advantages Of Mutual Funds).
Fidelity Advisor Dividend Growth A (FADAX - Free Report) invests primarily in companies that pay dividends or that the advisor believes have the potential to pay dividends in the future. FADAX’s year-to-date dividend yield is 1.01%. FADAX’s 3-year and 5-year annualized returns are 8.9% and 8.3%, respectively. Annual expense ratio of 1% is lower than the category average of 1.02%. FADAX has a Zacks Mutual Fund Rank #1.
Franklin Rising Dividends A (FRDPX - Free Report) invests a major portion of its assets in investments of companies that have paid consistently rising dividends. FRDPX’s year-to-date dividend yield is 1.31%. FRDPX’s 3-year and 5-year annualized returns are 7.4% and 9.2%, respectively. Annual expense ratio of 0.92% is lower than the category average of 1.02%. FRDPX has a Zacks Mutual Fund Rank #2.
Hartford Dividend and Growth A (IHGIX - Free Report) invests primarily in a portfolio of equity securities that typically have above average dividend yields. IHGIX’s year-to-date dividend yield is 1.37%. IHGIX’s 3-year and 5-year annualized returns are 8.6% and 9.9%, respectively. Annual expense ratio of 1.02% is lower than the category average of 1.1%. IHGIX has a Zacks Mutual Fund Rank #2.
Vanguard Dividend Growth Investor (VDIGX - Free Report) invests primarily in stocks that tend to offer current dividends. VDIGX’s year-to-date dividend yield is 1.82%. VDIGX’s 3-year and 5-year annualized returns are 10.9% and 11.9%, respectively. Annual expense ratio of 0.33% is lower than the category average of 1.02%. VDIGX has a Zacks Mutual Fund Rank #2.
About Zacks Mutual Fund Rank
By applying the Zacks Rank to mutual funds, investors can find funds that not only outpaced the market in the past but are also expected to outperform going forward. Pick the best mutual funds with the help of Zacks Rank.