Growth and Income Mutual Funds

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Are growth and income no-load mutual funds right for you?

Investors who are younger will likely look for rapid growth and not care about income from dividends.  These type of investors want to make the highest return possible.  they are not worrying too much about risk because they have an investment time horizon of twenty to thirty years.

But, there are other investors who are not as risk tolerant.  They are somewhat older and they may have a ten or fifteen year investment time horizon.

Your investment time horizon and your risk tolerance are a few of the factors that will determine what are acceptable investments for you.

Diversification and fees and expenses also play a part on how you invest.

When you are older, like me, you probably have a lower risk tolerance than someone who is twenty, thirty or forty years old.  That is understandable.

Now that you have retired, or are close to retiring you are looking for investments that keep up with inflation and give you an income.  You are worried about having a return as good as a growth stock fund, you prefer less risk.

It is my belief that everyone should have some exposure to the equities markets in their investment portfolio regardless of age.  But, you need to be more cautious when you are in your sixties, seventies and older.

You can’t really earn much on CDs or bonds in 2020 with interest rates just barely above zero at the time I am writing this blog post.

Full Disclosure:  I am not a bond guy so you won’t see me mention bonds very much on this blog.

As a former mutual fund sales person, I came to myself seeking advice.  I asked myself what would be a good no-load mutual investment for myself consisting of stocks rather than bonds, which provides the following:

  1. income
  2. some growth
  3. lower market risk

 

I did some research to find out what stocks pay good dividends.

In my research, I discovered three good dividend paying stocks.

  1. Coca Cola
  2. Pepsi
  3. Proctor and Gamble

 

Perfect, especially since I want stocks that are well established and not likely to go out of business any time soon.

Next, I conducted a search for what Fidelity mutual funds have Coke and Pepsi in their portfolio.  The search results brought up just what I was looking for.

Consumer Staples no-load fund

Let me clarify one thing.  Back in the 80s, when I was selling mutual funds, a fund that has the potential for growth and pays out a dividend was classified, or could be classified, as a growth and income fund.

Fidelity actually has a growth and income fund.  It only has a two star Morningstar rating compared to three stars for the consumer staples fund.  Plus, their growth and income fund can own bonds, which I am not a fan of.

Their actual growth and income fund is not performing as well for 2020 as the Fidelity consumer staples fund I found today.   But, over a long period of time it has out performed their consumer staples fund.

I am looking more for safety of principal over capital appreciation, and like I said, no bonds.

I came across a Fidelity no-load consumer staples fund.  Everyone buys and uses consumer staples, even in tough times.

Just what I was looking for because this fund pays a dividend twice a year, is not heavily invested in higher risk technology stocks, like many of the mutual funds I currently own, and provides some capital appreciation.

Earlier this year I did own the Vanguard Consumer Staples ETF, (Symbol: VDC) but I sold it fairly quickly because I did not like the way it was performing, at that time.  I made a small profit.  However, the performance of this ETF has improved since the beginning of July.

Although this Fidelity fund I came across only has a Morningstar rating of three, (UPDATE 10-28-2020: this fund is now only rated two stars) stars, I am happy.  If I remember correctly, according to Fidelity, this fund is only down something like 1.95% Y-T-D, as of the date of this blog post.

Most funds are down much more right now than this consumer staples fund.  The trade off is well worth it to me because I like less volatility along with good dividend payouts.

UPDATE: Since I originally wrote this blog post, I found a Fidelity fund that pays a dividend four time a year, rather than twice a year.  This equity income fund is rated four stars by Morningstar.

I moved my money out of the growth and income fund and into the equity income fund.

For me, the main differences between these two funds besides the star rating is that the equity income fund has an above average return while the growth and income portfolio fund is performing below average according to the Fidelity website.

To be fair, let me also say this.  According to Fidelity, over the past three, five and ten years, the growth and income fund is worth more than the value of the equity income fund.

In other words, had you invested in both funds on the exact same date, with the same amount of money, the growth and income fund would be worth more over the long term.

As of 10-27-2020, over the past ten years, the  growth and income portfolio fund is worth $29,012 compared to $24,023.  The growth and income portfolio fund has been out performing the equity income fund over the past three, five and ten years.

The 30 day yield for the growth and income fund is also a tiny bit better as shown below.

Growth and income portfolio fundYTD -8.16%, 1 year +2.27%,  3 years +5.04%, 5 years + 9.44%, 10 years +11.24%, as of the market close on 10-27-2020.  The thirty day yield for this fund, as of 9-30-2020 is 2.10%.

Equity income fundYTD -7.16%, 1 year -0.59%, 3 years +4.41%, 5 years +8.61%, 10 years +9.16%, as of the market close on 10-27-2020.  The thirty day yield for this fund is 2.06%, as of 9-30-2020.

NOTE:  The markets were down sharply at the close today, and I wrote this update before the markets closed.

I would say that the main reason that I switched from one fund to the other is because I would rather have a dividend payment every three months from the equity income fund rather than every six months with the growth and income portfolio fund.

PLUS, although the return may be higher with the growth and income portfolio fund, my risk tolerance is lower than it would be if I was ten or fifteen years younger.

End of 10-28-2020 update to this blog post.

Dividend payouts are never guaranteed and past dividend payments should not be an indication of future dividend payouts.

In the beginning of 2020 there were many companies which either did not pay a dividend or reduced their dividend payment due to the pandemic.

I am going to keep reinvesting my dividends back into this fund so that they compound over time.

Maybe I won’t make a ten, fifteen or twenty percent return on my investment in growth, but this fund will also not drop as much (less investment risk) as many funds will, especially technology heavy funds, when the market is in a downturn.  That is far more important to me since I am getting up there in age.

You may want to do something similar by investing in a no-load utility fund or ETF (exchange traded fund).  For example, Vanguard has a utility ETF (VPU).

The Vanguard Utilities ETF consists of electric utility companies, multiutilities and  water utility companies. VPU has an expense ratio of 0.1%.

This fund is currently paying a dividend every three months.  With interest rates being extremely low, this fund is a good alternative to bonds and could also be a good hedge against inflation.

This is not investment advice nor is this information a recommendation to buy or sell any security.  Do your own due diligence before investing in any securities.

Please leave a comment below.

Happy investing.

Jim Juris Signature

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