We talk a lot about the importance of building an all-inclusive portfolio in our Asset Allocation section. As far as Investment Management is concerned, you really need to incorporate all of the different asset classes in order to maintain a properly diversified portfolio that is sure to perform over the long-term and provide steady income and growth.

One of the key contributors to a steadily performing and growing portfolio is a dividend component. As far as dividend funds are concerned, there are several benefits to the investor. Not only can dividend funds boost earnings through dividend income and long-term growth prospects, but they can also safeguard the portfolio from dramatic and drastic losses. This is achieved based on the following:

• Dividend payouts not only provide income, but in most cases dividends that are paid out within mutual funds are reinvested within the fund, allowing the fund holder to purchase additional units and passively grow their holdings. To further illustrate the power of dividend reinvestment, consider that if an average Dividend Yield is 2.5% for a fictional dividend fund, then reaching outperforming the market will involve less risk. For a total return of 10%, the dividend fund need only achieve 7.5% growth in order to keep up with the market. This ultimately allows the fund manager to invest in less risky assets.
• Dividend Funds will naturally target stronger companies that involve less risk. As noted above, there is considerable comfort to be gained by the investor and fund manager when investing in dividend-paying securities. However, by virtue of the fact that dividend funds will target and hold securities that are paying dividends, there is some financial security backing those companies. If the dividend were cut or eliminated entirely, such companies would likely be dropped, pushing the security price down (look at GE’s stock price when it slashed its dividend in 2009). Therefore, dividend paying companies work hard to maintain their dividend payouts. As such, they do their best to maintain specific equity and capital, thereby making them stronger companies financially… at least in theory.
• Dividend Funds provide safeguards to your portfolio since they are normally built with stronger companies, meaning their Beta is normally lower than the broader market. Since these markets are hyper-sensitive to potential failures and perceived credit risks, holding stronger companies (or companies that appear stronger by virtue of maintained dividend payments) the funds that hold them are more likely to experience steadier growth rates and muted losses. So, while more speculative funds may be more prone to wild upward and downward swings that more-closely follow the market’s ups and downs, dividend funds will follow a less exciting (both positive and negative) path.

In the past, we have outlined the potential high yield investments, or specific bond funds, for 2010. While the Mutual Fund Site stands behind its top mutual fund pick for 2010, such investments are never a one-stop-shop for investors. Additional diversification is needed to flesh out the asset allocation model and regardless of the investor profile, dividend funds can fill the needs of almost every investor. For the conservative investor, dividend funds can provide that necessary diversification by allowing conservative exposure to the equity asset class; dividend funds provide steady income. For more aggressive investors, dividend funds provide additional diversification within the equity class, allowing for a proper long-term investment management strategy.

Regardless of your specific portfolio needs, make sure you incorporate dividend funds in your portfolio.