Best Income Funds

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Some investors don’t want risky assets that might yield high returns. Risk-averse investors tend to focus on assets that generate reliable income. Higher yields allow investors to retire sooner and not tap into their principal to cover living expenses. While you can build a stock portfolio with individual companies, income funds streamline the process. Each fund gives you a diversified portfolio of assets that have higher yields than most stocks. If you want to increase your annual dividends, you may want to give these income funds a closer look.

8 Best Income Funds to Invest In

Stock investors can choose from several income funds. Here are some of the top picks to quickly diversify your portfolio.

1. First Trust Morningstar Dividend Leaders Index (NYSEARCA: FDL)

The First Trust Morningstar Dividend Leaders Index contains 100 high-yield dividend stocks. The three largest positions are Verizon, AbbVie and Chevron, which are currently more than a quarter of the fund’s total assets. The fund currently has a yield above 4.5% which can help investors seeking extra income. The fund doesn’t appreciate too much, but it’s also less vulnerable to volatility and sharp downswings.

2. Vanguard High Dividend Yield Index Fund (NYSEARCA: VHYAX)

The Vanguard High Dividend Yield Index Fund has a yield above 3% and has appreciated more than some of the other funds on this list. Shares are up by over 25% over the past five years, providing a healthy mix of high yield and appreciation. The fund focuses on large-cap value stocks, has an expense ratio of 0.08%, and a minimum investment of $3,000. The fund focuses on dividend stocks and has Exxon Mobil, Johnson & Johnson and JPMorgan Chase as its three top holdings. 

3. PGIM High Yield Fund (NYSEARCA: ISD)

The PGIM High Yield Fund focuses on bonds and gives investors access to high income without significant volatility. The fund did take a hit in 2022 as the Fed raised interest rates, but this has been normal for the bond market. As interest rates stabilize, funds like ISD should perform better. While other stocks have appreciated more, ISD pays out monthly dividends to the tune of a dividend yield above 11%. If you factor in those dividend payments, ISD has been a profitable investment over the past five years.

4. Vanguard Total World Bond ETF (NASDAQ: BNDW) 

The Vanguard Total World Bond ETF focuses on world bonds and has a 0.05% expense ratio. The fund seeks to mirror the performance of the Bloomberg Global Aggregate Float Adjusted Composite Index. You only need to make a $1 investment to get started. The fund consists of over 17,000 bonds, with average durations of 6.9 years, average coupons of 2.6% and average yield to maturity of 5%.

5. American Funds Tax-Aware Conservative Growth and Income Portfolio (MUTF: TAIFX)

The American Funds Tax-Aware Conservative Growth and Income Portfolio fund has a mix of bonds and stocks and offers a yield that is a little over 2%. The top sector is healthcare, and 85% of its bonds and stocks are U.S.-based companies. It is a lower-risk fund that has rewarded investors with a 4% gain year-to-date. The fund invests in municipal bonds to minimize your tax payments on distributions.

6. T. Rowe Price Dividend Growth Fund (MUTF: PRDGX)

The T. Rowe Price Dividend Growth Fund doesn’t have a spectacular yield, as it only sits a little above 1%. However, the fund’s long-term gains have outpaced many of its competitors. PRDGX shares are up by over 50% over the past five years. The fund focuses on dividend stocks with low yields and high growth. At least 65% of the fund’s capital goes to stocks, with Microsoft, Apple and UnitedHealth Group representing the top three holdings. Those three stocks make up roughly 12% of the fund’s portfolio.

7. Federated Hermes Strategic Value Dividend Fund (MUTF: SVAAX) 

The Federated Hermes Strategic Value Dividend Fund focuses on large-cap value stocks that reward shareholders with cash flow. The fund has higher fees than others on the list but provides steady payments and a 4% yield. The company prioritizes utilities, consumer staples and healthcare, but it is invested in several sectors. The fund distributes a monthly dividend.

8. Fidelity U.S. Bond Index Fund (MUTF: FXNAX)

The Fidelity U.S. Bond Index Fund is a low-risk fund that offers stable cash flow, albeit low returns. Over 90% of the fund’s capital is allocated across U.S. bonds. Treasury bills consist of over 40% of the fund’s total weight, while corporate bonds make up 25% of the fund’s portfolio. The fund has a distribution yield of 3%.   

What is an Income Fund?

An income fund is a basket of stocks, bonds and other assets that generate cash flow for investors. These funds only consist of investments that pay dividends or interest. You won’t find non-dividend-paying stocks in these types of funds. Many income funds sacrifice more enticing growth opportunities for reliable, stable income for their investors. 

Types of Income Funds

Investors can choose from several types of income funds that align with their risk tolerance and preferences. Here are the types of income funds available to investors.

Balanced Funds

Balanced funds contain stocks and bonds. Some investors want to own both assets, and a balanced fund makes it easy to diversify your portfolio across many stocks and bonds. Balanced funds only buy stocks that pay dividends.

Bond Funds

Bond funds consist of Treasury bills and corporate bonds. These funds do not appreciate much but provide high, stable yields. They are optimal for risk-averse investors who want steady payments without risking significant losses.

Dividend Funds

Dividend funds invest in stocks that pay dividends. Some funds invest in dividend-growth stocks, assets that have lower yields but higher dividend growth rates. Other dividend funds focus on dividend-income stocks, assets that have high yields but very little room to support future dividend hikes or stock price appreciation. 

Benefits of Investing in Income Funds

Investing in income funds has several benefits. You can earn a return on your investment and receive steady cash flow. These funds typically have lower returns than growth funds, but income funds are less volatile. These funds don’t tend to swing 10% in either direction within a few weeks. Income funds also give you automatic portfolio diversification since you automatically get exposure to dozens of dividend stocks and bonds.

Where to Invest in the Best Income Funds

Investors can choose from several income funds. This list covers some of the top picks, but what about your brokerage firm? It’s also important to consider where you invest in these top income funds. The list below highlights some of the top brokers to consider.

Grow Your Portfolio with Consistent Cash Flow

Income funds aren’t flashy. These aren’t the funds that double in value within a few years. However, the low-risk nature of these funds puts investors at ease, and the steady distributions can make retirement goals more realistic. When you identify your financial goals and time horizon, it becomes easier to construct a portfolio of income funds that works for you.

Frequently Asked Questions 

Best Income Funds Methodology

The best income funds list has a mix of bonds, dividend income stocks and dividend growth stocks. Returns, risk levels, portfolio allocations and dividend yields were all assessed when compiling this list.