How Do ETF Dividends Work? (2024)

One of the ways that investors make money from exchange traded funds (ETFs) is through dividends that are paid to the ETF issuer and then paid on to their investors in proportion to the number of shares each holds.

If you're looking for an ETF that pays a steady stream of income, you might consider one of the many ETFs that focus on investments that historically have paid high dividends.

ETF issuers decide whether to pay these dividends directly or reinvest them in the fund. The fund prospectus makes it clear which it is.

The Timing of ETF Dividend Payments

Like any company that issues a stock dividend, an ETF's sponsor sets an ex-dividend date, a record date, and a payment date. These dates determine who will receive the dividend and when it will be paid. The timing of these dividend payments is on a different schedule than those of the underlying stocks and is set by the ETF sponsor.

For example, the ex-dividend date for the popular SPDR S&P 500 ETF (SPY) is the third Friday of the final month of a fiscal quarter (March, June, September, and December). If that date is not a business day, the ex-dividend date falls on the prior business day. The record date comes two days prior to the ex-dividend date. At the end of each quarter, the SPDR S&P 500 ETF distributes the dividends.

These dates are listed in the fund's prospectus, which is publicly available to all investors.

Just as like any stock shares, the price of an ETF often rises before the ex-dividend date—reflecting a flurry of buying activity—and falls afterward, asinvestors who own the fund before the ex-dividend date receive the dividend, and those buying afterward do not.

Dividends Paid in Cash

The SPDR S&P 500 ETF pays out dividends in cash. According to the fund’s prospectus, the SPDR S&P 500 ETF puts all dividends it receives from its underlying stock holdings into a non-interest-bearing account until it comes time to make a payout. At the end of the fiscal quarter, when dividends are due to be paid, the SPDR S&P 500 ETF pulls the dividends from the non-interest-bearing account and distributes them proportionally to the investors.

Some ETFs may temporarily reinvest the dividends from the underlying stocks into the holdings of the fund until it comes time to make a cash dividend payment. Naturally, this creates a small amount of leverage in the fund, which can slightly improve its performance during bull markets and slightly harm its performance during bear markets.

Dividends Reinvested

ETF managers also have the option of reinvesting investors' dividends into the ETF rather than distributing them as cash. The payout to shareholders is accomplished through reinvestment in the ETF's underlying index on their behalf.

Essentially, it comes out to the same amount:An ETF shareholder who receives a 2% dividend reinvestment from an ETF can sell those shares and take the cash.

Dividends Are Taxable

These reinvestments can be seen as a benefit, as it does not cost the investor a trade fee to purchase the additional shares through the dividend reinvestment.

However, each shareholder's annual dividends are taxable in the year they are received, even if they are received via dividend reinvestment.

Taxes on Dividends in ETFs

ETFs are often viewed as a favorable alternative to mutual funds in terms of their ability to control the amount and timing of income tax to the investor. However, this is primarily due to how and when the taxable capital gains are captured in ETFs.

Owning dividend-producing ETFs does not defer the tax on the dividends paid by an ETF during a tax year. The dividends that an ETF pays are taxable to the investor in essentially the same way as the dividends paid by a mutual fund are taxable.

Examples of Dividend-Paying ETFs

Here are five popular dividend-orientated ETFs.

1. The SPDR S&P Dividend ETF (SDY)

TheSPDR S&P Dividend ETF (SDY)is the most extreme and exclusive of the dividend ETFs. Ittracks the S&P High-Yield Dividend Aristocrats Index, which includes companies in the S&P Composite 1500 that have increased their dividends for at least 20 consecutive years.

Due to their long history of reliably paying these dividends, these companies are often considered less risky for investors seeking total return.

2. The Vanguard Dividend Appreciation ETF (VIG)

TheVanguardDividend Appreciation ETF (VIG) tracks the S&P U.S. Dividend Growers Index, amarket capitalization-weighted grouping of companies that have increased dividends for a minimum of ten consecutive years.

Its assets are invested domestically, and theportfolio includes many companies known for paying rich dividends, such as Microsoft Corp. (MSFT) and Johnson & Johnson (JNJ).

3. The iShares Select Dividend ETF (DVY)

The iShares Select Dividend ETF (DVY) is the largest ETF to track a dividend-weighted index. Similar to VIG, this ETF invests in U.S. companies but the focus is on smaller companies.

Roughly one-quarter of the 100 stocks in DVY's portfolio are utility companies. Other major sectors represented include financials, consumer staples, energy, and communication stocks.

4. The iShares Core High Dividend ETF (HDV)

BlackRock's iShares Core High Dividend ETF (HDV) is younger and uses a smaller portfolio than the company's other notable high-yield option, DVY. This ETF tracks aMorningstar-constructed index of 75 U.S. stocks screened by dividend sustainability and earnings potential, which are two hallmarks of the Benjamin Graham and Warren Buffett school of fundamental analysis.

In fact, Morningstar's sustainability ratings are driven by Buffett's concept of an "economic moat" that some businesses create to insulate themselves from their rivals.

5. The Vanguard High Dividend Yield ETF (VYM)

The Vanguard High Dividend Yield ETF (VYM) is characteristically low-cost and straightforward, like most Vanguard offerings. It tracks the FTSE High Dividend Yield Indexeffectively and demonstrates outstanding tradability for all investor demographics.

A particular quirk of the investment strategy for VYM is its focus on companies that pay very high dividends. As a result, this ETF's majority holdings are heavy in the financial and consumer staples sectors.

Other Income-Oriented ETFs

In addition to these five funds, there aredividend-focused ETFs that employ various strategies to increase dividend yield.

ETFs such as the iShares Preferred and Income Securities ETF (PFF) track a basket of preferred stocks from U.S. companies. The dividend yields on preferred stock ETFs should be substantially more than those of traditional common stock ETFs because preferred stocks behave more like bonds than equities and do not benefit from the appreciation of the company's stock price in the same manner.

Real estate investment trust ETFs such as the Vanguard Real Estate ETF (VNQ) track publicly traded equity real estate investment trusts (REITS). Due to the nature of REITs, the dividend yields tend to be higher than those of common stock ETFs.

There are also international equity ETFs, such as the WisdomTree Emerging Markets High Dividend Fund (DEM)or the First Trust Dow Jones Global Select Dividend Index Fund(FGD),which track higher-than-normal dividend-paying companies domiciled outside of the United States.

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.

Not all ETFs earn dividends for their shareholders, and some ETFs are invested primarily in stocks that historically pay high dividends to their shareholders.

If you're interested in investing in an ETF that produces regular income that is paid directly to you, check the prospectus to find out whether dividends are paid out to investors or reinvested in the fund.

Do I Owe Taxes on my ETF Dividends?

Yes. Dividends paid through an ETF or through a traditional mutual fund are taxed exactly as stock dividends are. The taxes are due in the year that the dividend payment is received, whether the dividend is paid to the shareholder or reinvested in the fund.

What Is a Dividend?

A dividend is a share in a company's profit for a quarter or a year that is paid to each of its investors. Some companies pay no dividends at all, relying on fast growth in their share prices to attract investors. At the other end of the spectrum, many well-established and profitable companies pay good dividends year after year. Their investors aren't buying and selling their shares to make a fast profit. They're holding onto their shares in order to create a steady stream of income.

The Bottom Line

Although ETFs are best known for tracking broad indexes such as the or the Russell 2000, many ETFs focus on dividend-paying stocks.

Historically, dividends have accounted for about 41% of the total returns of the stock market, and a strong dividend payout history is one of the oldest and surest signs of corporate profitability. If your goal is steady income, you might look at one of the many ETFs that focus on dividend-paying companies.

How Do ETF Dividends Work? (2024)


How Do ETF Dividends 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.

How are ETF dividend yields calculated? ›

How is the dividend yield calculated? Dividend yield formula
  • Distribution amount per unit / NAV per unit x 100%
  • $0.68 / $15.14 x 100% = 4.5%
Nov 22, 2023

How do you live off ETF dividends? ›

If you want to live off ETF dividends you'll need to consider the money you may have from Social Security benefits, pension benefits, 401(k)s, IRAs, and any other sources of income. Then you can start to estimate how much you'll need to fill in the gaps with ETF dividends.

How does distributing ETFs work? ›

The denomination “Distributing ETF” refers to the treatment of dividends that get paid by the underlying companies. A distributing ETF chooses not to reinvest internally these proceeds but rather to hand them out to the investors who have purchased shares of the fund.

Do ETFs pay dividends every 30 days? ›

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.

Are dividend ETFs worth it? ›

While dividend ETFs can offer stable income, their growth potential is generally lower over the long run. That said, dividend ETFs may outperform the S&P 500 during particular time frames, such as during a recession or a period of easing interest rates.

Do ETFs automatically reinvest dividends? ›

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.

What ETF pays the highest dividend? ›

Top 100 Highest Dividend Yield ETFs
SymbolNameDividend Yield
JEPYDefiance S&P 500 Enhanced Options Income ETF28.14%
MRNYYieldMax MRNA Option Income Strategy ETF27.15%
APLYYieldMax AAPL Option Income Strategy ETF26.67%
SQYYieldMax SQ Option Income Strategy ETF26.10%
93 more rows

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.

How much dividend stock do I need to make $1000 a month? ›

In a market that generates a 2% annual yield, you would need to invest $600,000 up front in order to reliably generate $12,000 per year (or $1,000 per month) in dividend payments. How Can You Make $1,000 Per Month In Dividends? Here are the steps you can take to build yourself a sufficient dividend portfolio.

Can you live off dividends of $1 million dollars? ›

Once you have $1 million in assets, you can look seriously at living entirely off the returns of a portfolio. After all, the S&P 500 alone averages 10% returns per year. Setting aside taxes and down-year investment portfolio management, a $1 million index fund could provide $100,000 annually.

How much money do you need to make $50,000 a year off dividends? ›

This broader mix of stocks offers higher payouts and greater diversification than what you'll get with the Invesco QQQ Trust. And if you've got a large portfolio totaling more than $1.1 million, your dividend income could come in around $50,000 per year.

How do you actually make money from ETFs? ›

How do ETFs make money for investors?
  1. Interest distributions if the ETF invests in bonds.
  2. Dividend. + read full definition distributions if the ETF invests in stocks that pay dividends.
  3. Capital gains distributions if the ETF sells an investment. + read full definition for more than it paid.
Sep 25, 2023

What is the difference between ETF distribution and dividend? ›

Dividends are payments by a company out of its profits to investors who own shares in the company. A dividend is usually paid in the form of cash or in additional shares of the company. Distributions are payments made by a 'Fund' like a managed fund or an exchange-traded fund (ETF) to an investor.

How does my money grow in a ETF? ›

Though ETFs allow investors to gain as stock prices rise and fall, they also benefit from companies that pay dividends. Dividends are a portion of earnings allocated or paid by companies to investors for holding their stock.

What is the rule 3 of dividend rules? ›

Rule 3 of Dividend Rules prescribes the conditions to be complied with for declaring dividend out of reserves. A pertinent question here is – whether a company can declare dividend out of 100% of the amount that has been transferred to General Reserve.

Do you buy ETF before or after dividend? ›

Ex-Dividend Date: Investors who buy an ETF before this date will receive the dividend payment, while those who purchase the ETF on or after this date will not receive the dividend.

Do any ETFs pay monthly dividends? ›

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.

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