Dividend Reinvestment Via ETFs

Dividend exchange traded funds are on a hot streak this year. Not only are companies raising payouts at an impressive clip, ETF issuers are meeting investors’ insatiable desire for yield with an array of new dividend-themed funds.

Investors have responded by allocating billions of dollars to dividend ETFs. Combined assets under management for U.S.-listed dividend ETF is now over $80 billion, well above the level seen last year at this time. The three largest dividend ETFs – the Vanguard Dividend Appreciation ETF (NYSEArca: VIG), iShares Select Dividend ETF (NYSEArca: DVY) and the SPDR S&P Dividend ETF (NYSEArca: SDY) – have over $44 million in combined assets. [Dividend ETFs Bigger Than U.S. Treasuries]

One question on the minds of some income investors is whether dividend reinvestment can be used as an income-boosting strategy the same way it is with stocks. The answer is yes, but as Morningstar points out, dividend reinvestment with ETF is subject to the rules of individual brokerages.

“Not all ETFs or brokerages allow dividends and income to be reinvested, so you would be wise to find out ahead of time whether this is an option. When purchasing an ETF, if the brokerage doesn’t ask whether you want the dividends and income reinvested, it may mean it doesn’t offer the service, but you might want to investigate further,” Adam Zoll for Morningstar.

The good news is most brokers allow clients to reinvest ETF dividends commission-free. “Scottrade, allows customers to pool income and dividend distributions from all their investments and reinvest them in up to five other investments without paying a commission,” according to Morningstar.