ETFs and Dividends – Learn all About it

1. Introduction

When it comes to stocks, especially dividend stocks, most investors have a firm grasp on the process of distributions and the dates surrounding the payout. On the other hand, that idyllic picture can get a little blurry when it comes to an ETFs and dividends that hold securities all paying dividends at different times.


2. What is dividend ETF?

Dividend ETF can be defined as any exchange-traded fund that seeks to provide high yield by investing in a basket of high-dividend-paying common stocks, preferred stocks or REITs. Moreover, there are only dividend ETFs that only contain U.S. domestic stocks and global dividend ETFs and they usually have a global focus. To create a dividend ETFs, the indexes used in their creation contain stocks with a very high level of liquidity and above-market dividend yield.

3. Breaking down ETFs and dividends

Although certain dividend ETFs are passively managed around an index, that index may be the results of the certain screen, such as quantitative screens and their companies usually come with a history of increasing their dividends, or even large blue-chip companies with a high level of safety. Of course, every safety is always perceived and there is a level of risk.

The expense ratio of dividend ETFs should be comparable or lower than the cheapest no-load mutual fund that has similar or even same investment objectives. As it goes with all ETFs, dividend ETFs can be traded intraday.

If you are an investor that is seeking a more adventurous lifestyle (read: riskier) these types of funds should be the core of your portfolio.


4. ETFs and dividends

Usually, when it comes to ETFs, dividends are straightforward. The most basic example would be SPDR S&P 500 ETF (SPY A) which is not only the most popular ETF in the world but also a dividend payer. According to the SPDR S&P 500 ETF (SPY A)’s prospectus, the fund puts all dividends into a non-interest bearing account until the time for payout comes.

At the end of the quarter, SPY pulls the dividends from the above said bearing account that is non-interest and distributes them to its investors.

The list below shows the dates SPY’s top five dividend-paying holdings distributes their respective dividends through 2013, and the date SPY itself made its distribution.

  • 11/14/2013: AAPL – Apple made a quarterly distribution of $3.05.
  • 12/10/2013: XOM – Exxon made a quarterly distribution of $0.63.
  • 12/10/2013: JNJ – Johnson & Johnson made a quarterly distribution of $0.66.
  • 12/12/2013: MSFT – Microsoft made a quarterly distribution of $0.28.
  • 1/27/2014: GE – General Electric made a quarterly distribution of $0.22.
  • 1/31/2014: SPY – The S&P 500 ETF made a quarterly distribution of $0.98025.

5. Conclusion

Investing into ETFs that pay a dividend is less complicated that it might seem on the surface as it has only two methods of paying out cash. Each has its own pros and cons when it comes to opening a position. As with every financial instrument, be sure to always look under the “hood” of the ETF you are investing into to ensure and understand how its dividends are paid out and how will that affect your overall trading goals.




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