What Is a Dividend ETF?
A dividend ETF is an exchange-traded fund (ETF) designed to invest in a basket of dividend-paying stocks. The fund manager will choose a portfolio of stocks, based on a dividend index, that pays out dividends to investors, thereby working as an income-investing strategy for individuals that purchase the ETF.
Key Takeaways
- A dividend ETF is an exchange-traded fund (ETF) designed to invest in a basket of dividend-paying stocks.
- Investing in dividend ETFs is an income-investing strategy as the stocks pay dividends, also known as income.
- Dividend ETFs are passively managed, meaning the fund manager follows an index and does not have to make trading decisions often.
- Dividend ETFs are good investment options for investors that are risk-averse and income-seeking.
Understanding a Dividend ETF
Dividend ETFs are established in order to gain high yields when investing in high-dividend-paying common stocks, preferred stocks, or real estate investment trusts (REITs). Dividend ETFs may contain only U.S. domestic stocks, or they may be global dividend ETFs, which have an international focus.
Most indexes used to create the dividend ETFs hold stocks with above-market dividend yields and a higher than average level of liquidity.These will vary, however, based on the ETFs that a fund manager picks and their specific investment approach.
Dividend ETFs are passively managed, meaning they track a specific index, but the index is usually screened quantitatively to include companies with a strong history of dividend increases as well as the bigger blue-chip firms that are generally considered to carry less risk.
A dividend ETF’s expense ratio should be lower or equal to the least expensive, no-load mutual fund. No-load mutual funds, by definition, can be bought or redeemed after a certain length of time without a commission or sales charge.Dividend ETFs are generally recommended for the generally risk-averse stock investor who is income-seeking.
Dividend ETFs vs. Other ETFs
Generally, ETFs offerinvestors the option to diversifywithin a given index; meaning that they will gain broad exposure to many stocks within a given index. Investors can alsosell short,buy on margin,and purchase as little as one share, as ETFs have no minimum deposit requirements. Furthermore, expense ratios are lower than those of the average mutual fund for most ETFs.
The main reason investors purchase ETFs is that they are easy to buy and sell like stocks, they offer diversification, broad market exposure, and they have low costs due to their low expense ratios. Investing in dividend ETFsoffers one strategy, butthere are a number of other types of ETFsinvestors might research and add totheir overall investment portfolio.
AnIPO ETF, for example, can be appealing for investors whowant to gain exposure toIPOs during their initial introduction to the market. They can diversifytheir investment across a pool of IPOs from a variety ofsectors and industries. The advantages in IPO ETF investmentsare rooted in thebenefits from potential upside growth in the share price. Yet,initial IPO success doesn't spell long-term stability, asthe value of holdings can decrease in value later.
IndexETFstrackabenchmark indexlike the as closely as possible. Investors can buy and sell index ETFsthroughout the day on a major exchange, and investors gain exposure to a variety ofsecurities in onetransaction. Depending on which index the ETF tracks, index ETFscan includeboth U.S. and foreign markets, specific sectors, or various asset classes, such as small-caps or blue-chips.
Finally, anETFof ETFstracks other ETFs instead of an underlying stock or index. An ETFof ETFsallows for more diversification than other ETFs. These are actively managed like managed funds, versus passively managed like other ETFs, so theycan be designed to factor invariables such as risk levels or time horizons.This approach can provide investors with low fees, immediate diversification, and broad exposure to strategies across different asset classes.
Investing in Dividend ETFs
Investors can access ETFs through their brokers or simply purchase an ETF like a stock on their own through online brokerage services. Some of the most popular ETFs are as follows:
- Vanguard Dividend Appreciation ETF (VIG)
- Fidelity International High Dividend ETF (FIDI)
- iShare Core High Dividend ETF (HDV)
- SPDR S&P Global Dividend ETF (WDIV)
- Schwab U.S. Equity Dividend ETF (SCHD)
FAQs
A dividend ETF is an exchange-traded fund (ETF) designed to invest in a basket of dividend-paying stocks. The fund manager will choose a portfolio of stocks, based on a dividend index, that pays out dividends to investors, thereby working as an income-investing strategy for individuals that purchase the ETF.
How does a dividend ETF work? ›
How Do Dividends Work in an ETF? ETF issuers collect any dividends paid by the companies whose stocks are held in the fund, and they then pay those dividends to their shareholders. They may pay the money directly to the shareholders, or reinvest it in the fund.
What is the dividend rule for ETFs? ›
The amount an investor gets in dividends is dependent on how many shares of the ETF they own – for example, if 1,000 shares of an ETF are available and a single investor owns 10, then they would hold 1% of the portfolio, and thus be entitled to 1% of dividend payments.
What is the simple explanation of ETF? ›
ETFs or "exchange-traded funds" are exactly as the name implies: funds that trade on exchanges, generally tracking a specific index. When you invest in an ETF, you get a bundle of assets you can buy and sell during market hours—potentially lowering your risk and exposure, while helping to diversify your portfolio.
What is the downside of dividend ETF? ›
Cons. No guarantee of future dividends. Stock price declines may offset yield. Dividends are taxed in the year they are distributed to shareholders.
What is the best dividend ETF to buy? ›
Topping my list is the Energy Select Sector SPDR Fund (XLE 1.40%). This ETF is a great choice for income-seeking investors for several reasons.
How to pick a good dividend ETF? ›
Research dividend funds: When selecting dividend ETFs, pay attention to factors like dividend history, dividend yield, the fund's performance, expense ratios, top holdings and assets under management. Investors can find this information in a fund's prospectus.
How many dividend ETFs should I own? ›
Experts agree that for most personal investors, a portfolio comprising 5 to 10 ETFs is perfect in terms of diversification.
How are dividends paid? ›
Cash dividends are paid out either as a check sent to the investor or as a credit to a brokerage account, which can then be reinvested. Stock dividends are paid in fractional shares. If a company issues a stock dividend of 5%, shareholders will receive 0.05 shares in dividends for every share they already own.
Can you live off ETF dividends? ›
So what does it mean to live off your dividends? If you invest in dividend-paying stocks, mutual funds, or ETFs, which provide distributions of stocks or cash to shareholders, over time, the cash generated by those dividend payments can supplement your income when you retire.
If you own shares of an exchange-traded fund (ETF), you may receive distributions in the form of dividends. These may be paid monthly or at some other interval, depending on the ETF. It's important to know that not all dividends are treated the same from a tax perspective.
Are ETF dividends automatically reinvested? ›
Automatic dividend reinvestment plans (DRIPs) directly from the fund sponsor aren't yet available on all ETFs although most brokerages will allow you to set up a DRIP for any ETF that pays dividends. This can be a smart idea because there's often a longer settlement time required by ETFs.
How do ETFs work for dummies? ›
A cross between an index fund and a stock, they're transparent, easy to trade, and tax-efficient. They're also enticing because they consist of a bundle of assets (such as an index, sector, or commodity), so diversifying your portfolio is easy. You might have even seen them offered in your 401(k) or 529 college plan.
How does an ETF make you money? ›
Most ETF income is generated by the fund's underlying holdings. Typically, that means dividends from stocks or interest (coupons) from bonds. Dividends: These are a portion of the company's earnings paid out in cash or shares to stockholders on a per-share basis, sometimes to attract investors to buy the stock.
How do ETFs work examples? ›
In the simple terms, ETFs are funds that track indexes such as CNX Nifty or BSE Sensex, etc. When you buy shares/units of an ETF, you are buying shares/units of a portfolio that tracks the yield and return of its native index.
Are ETF dividends paid monthly? ›
Dividend-paying exchange-traded funds (ETFs) have been growing in popularity, especially among investors looking for high yields and more stability from their portfolios. As with stocks and many mutual funds, most ETFs pay their dividends quarterly—once every three months.
How do you receive dividends from ETF? ›
If you want to receive a dividend for an ETF you don't yet own, you must buy it before the ex-date. Transact on or after the ex-date and you won't make it onto the registered shareholders list in time to be eligible for the dividend. The record date is usually one business day after the ex-date.
