Dividend-Focused Funds

Individuals should be wary when picking funds that invest in stocks that pay big dividends, says Dave Foster, a financial adviser in Cincinnati. A fund that targets high dividend yields could be invested in stocks from only a handful of industries—say, utilities and consumer staples, says Mr. Foster. A turn in the fate of one of the industries could lead to sharp swings in the value of the fund.

"What I would look for is funds…that are well diversified with sectors," says Mr. Foster. In 2008, for example, many dividend-oriented mutual funds had large investments in financial companies, which were big dividend payers at the time. After the financial meltdown, these companies cut their dividends across the board and their shares lost more value than other dividend-paying stocks.

Source: Wall Street Journal

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