Both dividend stocks and mutual funds function as investment vehicles that pay income to investors, but are structured differently. Unlike an individual stock, which represents an ownership share in one company, mutual funds hold a variety of stocks or even other types of securities, such as bonds.
Stocks that pay their investors a dividend (a portion of the company's earnings) are sometimes referred to as dividend stocks. Companies that are known to pay their investors dividends—and increasingly better dividends over time—are sometimes referred to as dividend aristocrats.
Dividend Stocks and Risk
Dividend stocks are sometimes sought as an investment vehicle because they appear less risky than other stocks. If a company is insolvent (financially unable to meet its obligations to investors and creditors), then it generally can't—or won't—pay out dividends to its investors. Therefore, investors assume there is less risk investing in a company that pays dividends, but that is not always true.
Dividend Stocks and Income
Dividend stocks can provide a steady income source, which makes them appealing to some investors. But when a company pays out dividends, it is not using all of its profit for future company growth or to invest in new equipment or improvements.
A mutual fund is a collection of stocks, bonds or other securities that an individual can invest in along with other investors, sharing the overall expenses—and the risk—as well as the profit.
Mutual Funds and Risk
Like dividend stocks, mutual funds can be considered less risky, but for a different reason. Mutual funds consist of different types of stocks or bonds, which means that while one part of the mutual fund is experiencing a loss, the other parts might be showing a profit.
Mutual Funds and Income
A mutual fund makes two kinds of earnings distributions to investors: a distribution of income from dividends and interest and a capital gains distribution, which results from capital gains realized from the sale of a fund's investments.