The theme of dividend investing has taken portfolios by storm, as ultra-low rates have forced investors to seek stable income elsewhere. As such, the growth of dividend ETFs has rapidly accelerated in recent years.
When it comes to dividend stocks, most investors have a firm grasp on the process of distributions and the key dates surrounding the payout. However, the picture can get a little cloudy when it comes to an ETF that holds securities all paying dividends at different times.
Using ETFdb.com’s Power Ranking system, you can easily view and download a list of all dividend-focussed ETFs. Furthermore, you can view how dividend ETFs as a group performed against other ETF strategies in terms of fund flows, returns, AUM, expenses and dividends.
Power Rankings are a unique way adopted by ETFdb.com to help investors understand 300+ market themes based on aggregated ETF data using investment metrics such as fund flows, return, AUM, expense ratio and dividend yield. Click here to view the whole list of themes.
ETFs and Dividends
For the most part, dividends are straightforward when it comes to ETFs. The most basic example is the SPDR S&P 500 ETF (SPY ), which is not only the most popular ETF in existence but also a dividend payer. According to its prospectus, the fund puts all dividends into a non-interest bearing account until the time comes to make a payout.
The ex-dividend date for SPY is the third Friday of the final month of a fiscal quarter (March, June, September, December). If that day should happen to not be a business day, then the ex-dividend date will fall on the day prior. The record date comes two days prior to the ex-dividend date. At the end of the quarter, SPY pulls the dividends from the non-interest bearing account and distributes them to its investors.
The list below displays the dates SPY’s top five dividend-paying holdings distributed their respective dividends throughout 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.
Check out our Stock Exposure tool to view and download a list of all ETFs that can provide you with exposure to a specific stock. For instance, the screenshot below shows a partial list of all ETFs holding Apple.
Holding the dividends in cash is one of the two most popular strategies in the ETF dividend world; the second is reinvesting the dividends back into the fund. A prime example of this comes from the Core S&P 500 ETF (IVV ). This popular product reinvests the dividends it receives back into the fund, creating something of a leverage for the product (probably at 1.001X) since it is investing with “borrowed” money.
When it comes time to make a payout, the fund pays out the dividends it accumulated. If IVV’s price has jumped during this period, then the extra principal left over that was made from reinvesting the dividends is left in the fund. Because of this, IVV will tend to slightly outperform SPY in bull stretches, despite employing the same strategy. Note that this process works in reverse, as a bear market will watch IVV perform slightly worse than its larger counterpart. The following table displays the fund’s annual returns for the last five years:
No matter how the fund performs, IVV will always pay out the amount of dividends it received. A bearish or bullish stretch does not impact how much in dividends is paid out.
Note that there are also funds that pay out dividends on a monthly basis rather than quarterly.
Premium members of ETFdb.com can use the ETF Screener to see a list of ETFs that pay dividends on a monthly basis, as shown below.
The ETF Screener is a unique screener designed by ETFdb.com to specifically help those investors who are looking to search for exchange-traded products based on a comprehensive set of criteria. You can apply ETF-specific filters including fund flows, holdings, fund structure and ESG scores to narrow down the list of securities that meet your investment objectives.
The Bottom Line
ETF dividend investing is less complicated than it seems on the surface, with two methods for paying out cash dominating most of the space. Each has its own pros and cons that investors should take into account before opening a position. Be sure to always look under the hood of your ETF prior to investing to ensure that you understand how its dividends are handled and how that will impact your overall trading goals.
Follow me on Twitter @JaredCummans.
For more ETF analysis, make sure to sign up for our free ETF newsletter.
Disclosure: No positions at time of writing.