An exchange-traded fund (ETF) includes a basket of securities and trades on an exchange. If the stocks owned by the fund pay dividends, the money is passed along to the investor. Most ETFs pay these dividends quarterly on a pro-rata basis, where payments are based on the number of shares the investor owns.
Key Takeaways
- 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.
Allocating Dividends
If an ETF has 100 shares of a company outstanding, the investor who owns ten shares has the right to 10% of the dividends earned by the ETF. The financial institution managing the ETF will receive the distribution and pass it to investors, usually quarterly.
If five stocks in the ETF pay quarterly dividends of $1 each and the fund owns ten shares of each of the stocks, the fund earns $50 in dividends per quarter. The investor who owns 10% of the shares of the ETF earns a quarterly dividend payment of $5.
The first ETF introduced in 1993 was the SPDR S&P 500 ETF (SPY), which tracks theS&P 500 Index.
Types of Dividends
There are two types of dividends that an ETF can pay to investors: qualified dividends and non-qualified dividends. The tax consequences for the two are different. Most investors will pay a lower rate on capital gains than on ordinary income. As of 2023, the capital gains tax was 0%, 15%, or 20% depending on income. The earned income tax rates range up to 37%.
- Qualified dividends: The ETF designates if the dividends distributed are qualified. The dividends are then taxed at the capital gains rate based on an investor's modified adjusted gross income (MAGI) and the taxable income rate that ranges from 0% to 20% in 2023, as determined by the Internal Revenue Service (IRS). An investor only earns the ETF-qualified dividend if they own the shares for more than 60 days during the 121-day period that begins 60 days before the ex-dividend date.
- Non-qualified dividends: Non-qualified dividends are the remaining ETF dividends equal to the total dividends minus any dividends treated as qualified dividends. These dividends are taxed at the investor's ordinary income tax rate and are commonly paid on stocks held by the ETF for 60 days or less.
8,800
The number of ETFs available to investors globally in 2023.
How Are ETF Dividends Paid to Investors?
ETF dividends maybe paid to investors in the form of a cash distribution or a reinvestment in additionalshares of the ETF.
How Do Individuals Invest in ETFs?
ETFs can be purchased or sold on a stock exchange in the same way as individual stocks. An ETF contains a basket of securities and is commonly structured to follow an index or industry sector, such as commodities, technology, or biotechnology.
How Do Investors Determine What Dividends Are Paid by an ETF?
Investors can research the dividend yield for the ETF, which is expressed as a percentage. The yield reveals how much a company pays out individendseach year relative to its stock price. Some ETFs focus on high-dividend investments. Two ETFs that focus on dividends include the SPDR S&P Dividend ETF (SDY), which tracks the S&P High-Yield Dividend Aristocrats Index, and the Vanguard Dividend Appreciation ETF (VIG), which invests in companies that have increased dividends for at least ten consecutive years.
The Bottom Line
Exchange-traded funds are similar to stocks in that they can be bought and sold throughout the trading day. An investor who wants to reap the benefits of dividends can choose an ETF that focuses on dividend-paying stocks. Dividends can be distributed as cash or reinvested in the ETF.
Correction—Dec. 1, 2022: This article was edited to update the definitions of both qualified and unqualified dividends that may be paid to investors in an Exchange Traded Fund (ETF).
FAQs
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 does an ETF pay dividends? ›
An exchange-traded fund (ETF) includes a basket of securities and trades on an exchange. If the stocks owned by the fund pay dividends, the money is passed along to the investor. Most ETFs pay these dividends quarterly on a pro-rata basis, where payments are based on the number of shares the investor owns.
How do ETFs reinvest dividends? ›
Mutual funds have made dividend reinvestment easy but reinvesting dividends earned from exchange-traded funds (ETFs) can be slightly more complicated. Dividend reinvestment can be done manually, by purchasing additional shares with the cash received from dividend payments, or automatically if the ETF allows.
How do I know if an ETF pays qualified dividends? ›
Qualified. To receive a qualified dividend, you must hold an ETF for more than 60 days during the 121-day period that begins 60 days before the ex-dividend date and ends 60 days after that date. This is the last day when new owners can qualify for the next dividend.
How are ETF distributions calculated? ›
Just like a share, the dividend yield, or distribution yield, for an ETF is expressed as a percentage of the ETF's market price, providing investors with a useful measure of the income that the fund has been paying over a specified period (usually 12 months).
Do all ETFs pay monthly dividends? ›
Whether stock ETFs pay monthly dividends usually comes down to the issuer. WisdomTree and Invesco are well-known as monthly payers, but you won't find Vanguard or iShares equity products on the list.
Do any ETFs pay monthly dividends? ›
ETFs paying monthly dividends are popular with investors willing to better manage cash flows and ensure predictable income. Below are such ETFs sorted by AUM, but it's worth studying other stats too.
How long do you have to hold an ETF to get a dividend? ›
Moreover, the investor must own the shares in the ETF paying the dividend for more than 60 days during the 121-day period that begins 60 days before the ex-dividend date. This means if you actively trade ETFs, you probably can't meet this holding requirement.
What is the best dividend paying ETF? ›
- Invesco High Yield Equity Dividend Achievers ETF (PEY)
- SPDR Portfolio S&P 500 High Dividend ETF (SPYD)
- iShares 20+ Year Treasury Bond BuyWrite Strategy ETF (TLTW)
- VanEck IG Floating Rate ETF (FLTR)
- Janus Henderson AAA CLO ETF (JAAA)
- VanEck Preferred Securities ex-Financials ETF (PFXF)
Top 100 Highest Dividend Yield ETFs
| Symbol | Name | Dividend Yield |
|---|
| AAPB | GraniteShares 2x Long AAPL Daily ETF | 25.49% |
| FLJH | Franklin FTSE Japan Hedged ETF Franklin FTSE Japan Hedged Fund | 22.03% |
| RYSE | Vest 10 Year Interest Rate Hedge ETF | 21.98% |
| MAXI | Simplify Bitcoin Strategy PLUS Income ETF | 21.47% |
93 more rowsDividends 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.
Do you pay taxes on ETFs every year? ›
For ETFs held more than a year, you'll owe long-term capital gains taxes at a rate up to 23.8%, once you include the 3.8% Net Investment Income Tax (NIIT) on high earners. If you hold the ETF for less than a year, you'll be taxed at the ordinary income rate.
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 often does ETF pay dividends? ›
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.
What is an ETF for dummies? ›
An exchange-traded fund (ETF) is something of a cross between an index mutual fund and a stock. It's like a mutual fund but has some key differences you'll want to be sure you understand. Here, you discover how to get some ETFs into your portfolio, how to choose smart ETFs, and how ETFs differ from mutual funds.
Does Vanguard automatically reinvest dividends? ›
Transfer to a Vanguard® fund.
Use our Directed Dividend Plan to have your dividends and/or capital gains distributions reinvested automatically in shares of another identically registered Vanguard holding.
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 often does an ETF pay dividends? ›
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.
Are ETF dividends 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 S&P 500 ETFs pay dividends? ›
The Invesco S&P 500 High Dividend Low Volatility ETF has a 4.74% dividend yield, the highest among our recommendations, but its risk is average. Meanwhile, the iShares Core High Dividend ETF has a 4.09% dividend yield but an expense ratio of only 0.08%, much lower than the 0.3% ratio for the Invesco fund.
