In today’s market, dividend paying assets are popular choices to invest in. Many investors choose dividends because they can have a stable portfolio, guard against risk, or even create a new stream of revenue.
To help accomplish these goals, people are turning to dividend ETFs. Be aware however, that dividend ETFs are a little different when compared to other investment products. Here is a closer look at dividend ETFs.
A dividend ETF is made up of dividend paying stocks. The stocks that are in the index are based on their yield. Many ETFs use a general strategy that looks at the entire market, but they can also be segmented.
Some dividend ETFs are based on the market of different stocks. Other ETFs are based on location, such as a country specific dividend ETF.
How Are The Dividends Paid
The dividend goes into your brokerage account. Examples of this are a mutual fund or stock. Some plans are available that will reinvest the dividend back into the initial asset.
With a dividend ETF, the dividend is not buying shares of fund stock, it is buying more shares of the ETF. Be aware that there may be a fee charged for each transaction.
Dividend ETFs are taxed. The tax rate is decided by whether the dividend has a qualified or unqualified classification. Qualified dividends are determined by the length of time that an asset is held.
Unqualified dividends are not seen by the government as true dividends. Examples of unqualified dividends include dividends on market market accounts, short term capital gains on mutual funds, and dividends in your IRA. These dividends are all taxed at the regular rate.
Dividend ETF Advantages
Dividend ETFs create a revenue stream, and people consider them as a safe alternative to other investments. Dividend ETFs offer diversification, stability, and the ability to hedge inflation and risk.
Dividend ETF Disadvantages
While dividends can be a hedge against inflation, oftentimes yields do not perform better than inflation rates, so they are not really hedging the risk. Some companies that pay dividends can choose to slash the dividend or completely get rid of it.
A possible solution that some dividend ETFs use to guard against a decrease in dividend is by choosing stocks that have been consistently paying dividends or have a secure yield.
Choosing A Dividend ETF
There are multiple factors that go into selecting the right dividend ETF. You should look at your portfolio and overall financial goals. Make sure that you do thorough research on all dividend ETFs before doing anything.
Watch how different funds react to changing market conditions. Pay attention to how the funds are made up. Talk to a financial adviser or stock broker to get some insight from them on how to proceed going forward.
Some popular types of dividend ETFs are the Vanguard High Dividend Yield ETF, the iShares US Preferred Stock ETF, and the Vanguard Dividend Appreciation ETF. Remember to take your time and figure out which dividend ETF is best for your situation.