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Mutual Fund Commentary

An imminent rate hike, Brexit and Deutsche Bank AG’s (DB - Analyst Report) inadequate capital cushion continue to dampen investors’ sentiments. October is also expected to be a volatile month for equities, thanks to the upcoming presidential elections.

To overcome the adversities, income seeking investors should look for funds that are exposed to stocks providing juicy dividends. Dividend is mostly paid by companies that boast solid financial structure and healthy underlying fundamentals, and are unperturbed by market turbulence.

Rate Hike, Brexit Concerns

The European Central Bank (ECB) might wind down its bond purchases of 80 billion euros ($89.7 billion) a month before the program’s scheduled Mar 2017 conclusion. This has compelled investors to get ready for a rate hike. Several Fed officials in the U.S. including Richmond Fed President Jeffrey Lacker also advocated an imminent rate hike. Mounting expectations of a rate hike weighed on investors’ sentiments. Ultra-low interest rates had aided economic recovery for a considerable period of time, leading to a bull run in the markets.

Investors also fear that a Brexit will weaken U.K’s economy, decelerate global growth and create fresh spells of gyration in the financial markets across the world. Britain’s Prime Minister Theresa May has already set the country on course to leave the European Union by 2019 (read more: Brexit Panic: 7 Ways to Trade the Vote).

Deutsche Bank Adds to Woes

Deutsche Bank’s woes, meantime, continue to unnerve investors. The German lender endured questions as to whether it can withstand the cost of any settlement with the U.S. Department of Justice. A research firm warned that the bank may tap shareholders for more cash in the wake of the $14 billion fine.

A handful of hedge funds that clear derivatives through the bank withdrew excess cash and positions, according to a Bloomberg report. Some of the funds that have moved part of their listed derivatives holdings to other firms included Izzy Englander’s $34 billion Millennium Partners, Chris Rokos’s $4 billion Rokos Capital Management, and the $14 billion Capula Investment Management (read more: Forget Deutsche Bank, Buy These 3 Foreign Banks Instead).

Brace for More Volatility

Amid all these uncertainties, this month, historically, has earned a formidable reputation of providing dismal returns ahead of elections. The CBOE Volatility Index (VIX), a gauge of near-term investor anxiety, has always risen significantly in the past six presidential elections this month, except for 1996, when Bill Clinton handily won the re-elections.

On the other hand, the S&P 500 averages a decline of 0.7% and the Dow industrials averages a 0.8% drop this month, according to the Stock Trader’s Almanac, which dates back to 1950. The performance of the more-volatile indices like the Nasdaq and the Russell 2000 is worse, with an average setback of over 2% (read more: 4 Low Beta Consumer Staples Stocks for a Risky October).

Top 4 Dividend Mutual Fund Picks

As the broader markets are expected to face greater bursts of volatility in October, income-seeking investors should turn toward mutual funds exposed to stocks that provide higher and stable dividend yields.

Companies that pay dividends persistently put a ceiling on economic uncertainty. These companies have steady cash flows and are mostly financially stable and mature companies, which help their stock price increase gradually over a period of time. Moreover, dividends are less taxed as compared to interest income, help your portfolio to grow at a compounded rate and offer protection from earnings manipulation.

We have selected four such mutual funds that offer promising 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.

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

Fidelity Advisor Dividend Growth I ((FDGIX - MF report) ) invests primarily in companies that pay dividends or that the advisor believes have the potential to pay dividends in the future. FDGIX has a dividend yield of 1.14%. The fund’s 3-year and 5-year annualized returns are 7.8% and 15.1%, respectively. Annual expense ratio of 0.76% is lower than the category average of 1.04%. FDGIX has a Zacks Mutual Fund Rank #1.

Hartford Dividend and Growth A (IHGIX - MF report) invests primarily in a portfolio of equity securities that typically have above average dividend yields. IHGIX has a dividend yield is 1.26%. The fund’s 3-year and 5-year annualized returns are 8.8% and 14.5%, respectively. Annual expense ratio of 1.02% is lower than the category average of 1.16%. IHGIX has a Zacks Mutual Fund Rank #2.

Fidelity Strategic Dividend & Income (FSDIX - MF report) invests in assets with a focus on equity securities that pay current dividends. FSDIX has a dividend yield is 2.42%. The fund’s 3-year and 5-year annualized returns are 8.9% and 13.1%, respectively. Annual expense ratio of 0.75% is lower than the category average of 0.87%. FSDIX has a Zacks Mutual Fund Rank #1.

Vanguard Dividend Growth Investor (VDIGX - MF report) invests primarily in stocks that tend to offer current dividends. VDIGX has a dividend yield is 1.68%. The fund’s 3-year and 5-year annualized returns are 9.8% and 14.7%, respectively. Annual expense ratio of 0.33% is lower than the category average of 1.04%. VDIGX has a Zacks Mutual Fund Rank #2.

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