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.
How do you analyze dividend ETF? ›
Generally, dividend-focused ETFs take one of two approaches when selecting their holdings:
- Highest payers focus exclusively on those companies that have the highest dividend yields among their peer group.
- Consistent payers focus on companies that have a history of paying, or even increasing, their dividends.
These dividends are paid on stock held by the ETF, which must own them for more than 60 days during the 121-day period that begins 60 days before the ex-dividend date.
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.
How does monthly dividend ETF work? ›
Dividend ETFs work by investing in a portfolio of stocks that have a history of paying regular dividends. These ETFs aim to provide investors with a source of income through the distribution of dividends from the underlying stocks.
What is the best dividend ETF to buy? ›
Amidst the plethora of dividend-paying ETFs available, three stand out for their performance and reliability: the JPMorgan Equity Premium Income ETF (JEPI 0.07%), the Schwab U.S. Dividend Equity ETF (SCHD -0.33%), and the Vanguard International High Dividend Yield Index Fund ETF Shares (VYMI -0.78%).
Are dividend ETFs worth it? ›
Dividend ETFs are better suited for those who want to tap into the stock market's growth, but the value of these ETFs will bear the market's ups and downs. The income from covered-call ETFs is the highest, but the underlying portfolio won't grow by much and the level of income is subject to large swings.
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. But the number of ETFs is not what you should be looking at.
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.
Do ETFs pay dividends monthly? ›
Thankfully, there are some stock ETFs that do pay dividends on a monthly basis. They're definitely in the minority, but there are enough where you can actually build a pretty diversified portfolio using just monthly pay stock ETFs. Whether stock ETFs pay monthly dividends usually comes down to the issuer.
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 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? ›
ETFs are designed to provide exposure to a specific industry, such as oil, medicines, or high technology. Commodity ETFs: These funds are designed to track the price of a certain commodity, such as gold, oil, or corn. Leveraged ETFs: These funds are designed to employ leverage to boost returns.
What is the best way to explain ETF? ›
An exchange-traded fund, or ETF, is a basket of investments like stocks or bonds. Exchange-traded funds let you invest in lots of securities all at once, and ETFs often have lower fees than other types of funds. ETFs are traded more easily too. But like any financial product, ETFs aren't a one-size-fits-all solution.
Are dividend ETFs a good idea? ›
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.
Do dividend ETFs actually pay dividends? ›
ETFs pay dividends earned from the underlying stocks held in the ETF. An ETF that receives dividends must pay them to investors in cash or additional shares of the ETF. Dividends may be taxed at the long-term capital gains rate or the investor's ordinary income tax rate.
Are ETFs good for dividend investing? ›
Like bonds, well-constructed dividend ETFs that adequately control their risks can provide fairly consistent payouts. The stocks underpinning these ETFs can grow and become more valuable over time. Such growth can lead to higher dividend payouts if yields remain steady.
