The Inner-Workings of Dividend ETFs | ETF Trends

Dividend exchange traded funds (ETFs) can be a great way to add some stability and income to your portfolio. That aside, they still do need a little understanding before you jump in.

An ETF that owns stocks will collect the dividends based on the number of shares of the underlying companies it owns over the course of time, explains Michael Rawson for Morningstar. [Dividend ETFs: Looking for a Little More Income?]

These dividends are gathered and then get paid out to shareholders. But how are these amounts figured? [3 Approaches to Dividend ETF Investing.]

Rawson sheds some light:

  • Dividend yield is  represented by the sum of all dividends paid by the fund over the past 12 months, divided by the previous month-end net asset value (NAV).
  • When researching a dividend yield, there are two numbers that come up: an average dividend yield and a dividend yield.  The difference between the fund’s dividend yield and the weighted average dividend yield on the underlying stocks in the portfolio is calculated, which is deducted from dividends before they are paid out to shareholders.
  • In order to receive a dividend, you must be the registered owner of the fund by the record date. Because ETF trades take three days to settle, you need to buy the fund before then to receive the next dividend.
  • However, that doesn’t mean you can buy the fund just before the ex-date to get extra dividends. The NAV of the fund will adjust downward by the amount of the dividend, so any gain you get from receiving an extra dividend will be offset by a decline in the NAV, at least in an efficient market.

Tisha Guerrero contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.