Dividend growth ETFs, which typically own stocks that have raised dividends for a long period, may not actually have a good track record for growing dividends. Hamman points out that if a company does not raise its dividend or even cuts the dividends, the ETF could remove the stock and replace it with another that meets the underlying index’s criteria for inclusion. Consequently, the replacement stock could issue a lower yield, effectively diminishing the overall dividend paid by the ETF. [Cue up Quality With This Global Dividend ETF]
“Many dividend ETFs had heavy exposure to financial stocks and now have less, which has been a drag on the dividends these funds pay,” Hamman said.
Moreover, investors have to consider an ETF’s own dividend payout time frame. For instance, the ETF may adhere to its own schedule, dishing out dividends after an underlying stock pays out its dividends. Consequently, an ETF could pay out less dividends if the fund doubles in size between receiving underlying stock’s dividend and paying its own dividend to fund shareholders.
For more information on dividends, visit our dividend ETFs category.