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? ›
Here's a list of things to consider when evaluating ETFs.
- Expense Ratio - in general, lower is better.
- Investing Strategy - how is the fund selecting stocks for the portfolio and what metrics is it looking at.
- Portfolio Composition - which sectors is the fund invested in how much is large-caps vs.
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.
Are dividend ETFs worth it? ›
All things considered, high-dividend ETFs are an excellent option for investors who have income as a primary objective but who may not want to comb through individual stocks. *As of May 28 close. Low commission rates start at $0 for U.S. listed stocks & ETFs*. Margin loan rates from 5.83% to 6.83%.
What is the best dividend ETF to buy? ›
21 Best Dividend ETFs and Mutual Funds for 2024
- BlackRock Equity Dividend MADVX.
- Capital Group Dividend Value ETF CGDV.
- ClearBridge Dividend Strategy LCBOX.
- Columbia Dividend Income CDIRX.
- Fidelity High Dividend ETF FDVV.
- FlexShares Quality Dividend ETF QDF.
- Franklin U.S. Low Volatility High Dividend ETF LVHD.
There are ETFs that pay dividends monthly, such as the JPMorgan Equity Premium Income ETF (JEPI) and the Global X Nasdaq 100 Covered Call ETF (QYLD). However, these don't necessarily invest exclusively in monthly dividend stocks — instead, they sell covered calls on stocks and use them to pay monthly dividends.
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.
What is the difference between a dividend ETF and a stock? ›
Dividend ETFs and stocks have several differences, including: Diversification: Dividend ETFs invest in a portfolio of stocks, while individual stocks represent ownership in a single company. This means that dividend ETFs provide investors with greater diversification, which can help to reduce risk.
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.
Can you live off ETF dividends? ›
Can you live off ETF dividends? While it is possible to live off ETF dividends, you'll need to do some careful planning to make it happen. You'll need to balance how much income your investments bring in, and how much you spend.
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.
Are dividend ETFs good for retirement? ›
For those who want to enjoy retirement, there are two primary goals. First, you must protect your money. Second, you want to create passive income that helps pay your living expenses without selling your investments. Exchange-traded funds (ETFs) are a great tool to achieve both goals.
Is there a downside to dividend investing? ›
Despite their storied histories, they cut their dividends. 9 In other words, dividends are not guaranteed and are subject to macroeconomic and company-specific risks. Another downside to dividend-paying stocks is that companies that pay dividends are not usually high-growth leaders.
Should I invest in S&P 500 or dividend ETF? ›
Key Takeaways. Dividend ETFs invest in high-yielding dividend stocks to maintain a stable, steady income. The S&P 500 is a broad-based index of large U.S. stocks, providing growth and diversification. The best choice for you will depend on whether you prefer income or growth from your investments.
Do you pay taxes on ETF dividends? ›
Dividends and interest payments from ETFs are taxed similarly to income from the underlying stocks or bonds inside them. For U.S. taxpayers, this income needs to be reported on form 1099-DIV. 2 If you earn a profit by selling an ETF, they are taxed like the underlying stocks or bonds as well.
Is it better to take dividends or reinvest? ›
Your Money Will Grow Exponentially Thanks To Compounded Growth: Arguably the best advantage of dividend reinvestment is that it allows you to buy more shares of the same stock and build wealth over time. By purchasing more shares of the same stock with passive dividends, your investment grows further as you reinvest.
