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The U.S. stock market continues to bleed in the holiday season as retail sales have declined and the Federal Reserve raised interest rates. The Dow, the S&P 500 and the Nasdaq have posted a negative return of 8.63%, 18.26% and 30.90%, respectively, so far this year.

Inflation, which was at a 40-year high, remained the most dominant threat to the economy in 2022. However, November’s consumer price index (CPI), which is the most accepted gauge for tracking inflation came in at 7.1%, showing signs of cooling off as compared to the highs of 8.2% in September and 8.3% in August. Yet, it remained way higher than the Fed’s 2% goal, indicating further monetary tightening measures in the near term.

In yet another meeting on Dec 14, 2022, Fed Chair Jerome Powell increased the overnight interest rate by a 0.5 basis point, raising fears that the Fed’s persistent interest rate hikes could tip the economy into a recession. With the latest hike in interest rate from near zero percent in a single year, the current range of rate is 4.25% to 4.5%, which is the highest in 15 years.

Meanwhile, retail sales in November declined 0.6%, as reported by the Commerce Department, and showed that inflation had taken a toll on consumer spending. This is something that doesn’t bode well for the economy vis-à-vis the stock market.

On the international front, China’s widespread COVID-control policy has taken a toll on its growth. Retail sale fell by 5.9% from a year ago and industrial production, which grew by 2.2%, failed to meet Street expectation. Exports for the month of November fell by 8.7% from a year ago due to declining global demand. High energy costs due to the ongoing war in Ukraine have aggravated one of the worst energy crises in recent decades, causing a global supply-chain disturbance.  

Since these events are unlikely to be resolved soon, investors looking to diversify their portfolios and earn a regular income can choose dividend-paying mutual funds.

Mutual funds, in general, reduce transaction costs and diversify portfolios without an array of commission charges that are mostly associated with stock purchases.

We have, thus, selected three mutual funds that have a promising dividend yield, have given impressive 3-year and 5-year annualized returns, boast a Zacks Mutual Fund Rank #2 (Buy), offer a minimum initial investment within $5,000 and carry a low expense ratio as compared to its category average.

BlackRock High Equity Income Fund (BMEAX - Free Report) seeks high current income along with capital appreciation by investing most of its assets, along with borrowings, if any, in equity securities, preferably in large-cap securities. BMEAX advisors also invest in equity-related instruments like equity-linked notes that provide exposure to equity securities and covered call options or other types of financial instruments.

Tony DeSpirito has been the lead manager of BMEAX since Jun 12, 2017, and most of the fund’s holdings were in finance (15.46%), technology (12.90%) and health (7.4%) as of Nov 30, 2022.

BMEAX’s dividend yield is 6.12%. The fund’s 3-year and 5-year annualized returns are 8.4% and 7.1%, respectively. The annual expense ratio of 1.10% is in line with the category average of 1.11%. BMEAX has a Zacks Mutual Fund Rank #2.

UBS Dynamic Alpha Fund (BNAAX - Free Report) seeks capital appreciation along with current income by investing most of its net assets in global equity, global fixed income and cash equivalent markets, including global currencies. BNAAX advisors may invest in domestic and foreign issues with high potential.

Alan Zlatar has been the lead manager of BNAAX since Apr 20, 2018, and most of the fund’s holdings are in Others (93.12%) and Finance (6.88%) as of Nov 30, 2022.

BNAAX’s dividend yield is 8.3%. The fund’s 3-year and 5-year annualized returns are 1.9% and 0.9%, respectively. The annual expense ratio of 1.35% is lower than the category average of 1.52%. BNAAX has a Zacks Mutual Fund Rank #2.

Tortoise Energy Infrastructure and Income Fund (INFRX - Free Report) invests most of its assets in equity and debt securities of companies focused on the energy infrastructure sector and in equity and debt securities of master limited partnerships focused on the energy infrastructure sector. INFRX may also choose to invest a small portion of its assets in restricted securities.

Brian A. Kessens has been the lead manager of INFRX since Oct 30, 2020, and most of the fund’s holdings are in others (35.14%), utilities (31.14%) and energy (18.02%) as of Nov 30, 2022.

INFRX’s dividend yield is 5.5%. The fund’s 3-year and 5-year annualized returns are 12.4% and 6.3%, respectively. The annual expense ratio of 1.38% is almost in line with the category average of 1.56%. INFRX has a Zacks Mutual Fund Rank #2.

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