Everything you should know about ETF dividends

Like stocks, ETFs also pay dividends. In the U.S., you'll find some ETFs boasting dividend yields exceeding 10%!

Curious about the benefits of dividends and how to track and analyze them? This guide's got you covered.

Benefits of ETF's dividends

Dividends can provide investors with the following benefits:

- Income Generation: The most obvious benefit is an added stream of regular income, which can be especially useful during retirement.

- Cash Bucket: Refill cash in the investor's portfolio for flexible use.

- Tax Considerations: In some cases, qualified dividends can be taxed at a lower rate than ordinary income, giving you potential tax advantages.

How do I check ETF's dividend data?

On moomoo, you can click a specific ETF > Fund > Dividends and find the dividend data, including the following information:

- Last dividend payout time and amount

- Dividend Yield TTM

- Payout frequency

- Payout history and historical dividend yields

The Dividend Yield is a key metric to consider. Next, we'll explore how to understand it.

Understanding dividend yield

Dividend Yield = Dividend per share / Price per share, representing the dividend income you earn for every dollar invested.

There are two types of dividend yields to know:

Trailing dividend yield

Trailing Yield = Past 12 months' dividends / Current share price.

The trailing yield offers a more current valuation of the ETF's yield but may not be the actual dividend yield after an investor buys, as the ETF may increase or decrease its dividend payout.

Historical dividend yield

Historical Yield = Annual dividend per share / Year-end share price.

Generally speaking, a consistent and stable payout record might indicate excellent management of ETFs.

If the dividend yields vary significantly from year to year, it could indicate that the ETF's share price is highly volatile or that the ETF's dividend payout is erratic.

Don't chase high dividend yields blindly

A high yield may attract investors who love dividends, but it doesn't always signal a good investment. It may indicate that a company is selling assets to pay dividends or that its stock price has dropped.

In addition, the dividend yield of ETFs is often negatively correlated with share price growth.

Therefore, when investing in ETFs, one should not solely chase high dividend yields but should consider products with solid stock prices.

How should I utilize dividends?

When the dividend arrives, it can be withdrawn for living expenses. However, some investors may let the money lie quietly in their accounts, receiving only a shallow interest rate. This will drag down the investor's return.

If the dividends are reinvested in more ETF shares, there will be a compounding effect over time, increasing the return.

Take a U.S. high dividend ETF as an example. Assuming $10,000 is invested on July 1, 2014, and dividends are reinvested, the account balance would be $24,377.90 by June 30, 2024, with an annualized return of 9.32%. In contrast, if no dividends are reinvested halfway, the account balance at the end of ten years would be only $21,951.78, with an annualized return of 8.18%.

A Dividend Reinvestment Plan (DRIP) could be a choice for those investors who decide to reinvest dividends. Provided by some brokers, DRIP automatically reinvests cash dividends into additional ETF shares on the payment date. This service is fee-free and allows you to buy fractional shares.

If you want to know how to find and enable DRIP on moomoo, here's a how-to guide to show you the way.

How to set up DRIP for US stocks & ETFs

Another two essential questions

What type of ETFs should I choose, high dividend ETFs or dividend growth ETFs?

High dividend ETFs, often labeled with terms like 'dividend' or 'high dividend,' focus on stocks that provide substantial dividend payouts.

Dividend growth ETFs, usually named 'dividend growth' or 'dividend appreciation,' choose stocks that may offer smaller dividend payments but have a consistent record of increasing those dividends over time.

High-dividend ETFs cater primarily to investors with higher cash usage needs, while dividend growth ETFs might have higher long-term returns.

Is the more frequent dividend payout, the better?

ETFs offer dividend frequencies ranging from annually, semi-annually, quarterly, to monthly. The choice primarily depends on investors' need for cash flow, and it's not always better to have higher frequency.

Bond ETFs dominate the market for monthly dividends, offering low risk but also relatively lower overall returns.

Takeaways

To summarize:

Firstly, a higher dividend yield for ETFs is not necessarily better. Investors may consider ETFs with:

- A long and stable history of dividend payments

- Dividends should ideally be growing

- Stable or growing share prices

Second, after receiving interest, a DRIP (Dividend Reinvestment Plan) could potentially help investors enhance their returns.

Lastly, investors with regular cash flow needs may consider high-dividend ETFs and monthly dividend ETFs, while those seeking higher long-term returns may opt for dividend growth ETFs.

How to find dividend ETFs

If you're an ETF investor primarily focused on dividend income, moomoo can help you quickly locate dividend ETFs.

On moomoo, Click Markets > ETFs > Thematic ETFs to find the Dividend ETF section, Quarterly Dividend ETF section and Monthly Dividend ETF section, where you can see more detailed lists of dividend ETFs.

In addition to dividend data, you can check other key screening criteria like Holdings, AUM, and Management Fee by going to Fund > Breakdown or Profile.