Do ETFs pay dividends?
One of the ways that investors make money from exchange traded funds (ETFs) is through dividends that are paid to the ETF issuer and then paid on to their investors in proportion to the number of shares each holds.
Dividend-paying ETFs can be a great tool for those looking to increase cash flow and diversify their investments. They offer a simple solution to getting exposure to a specific investing niche — in this case, stocks that pay a regular dividend. You can use those dividends to pad your income as many retirees do.
| Symbol | Name | Dividend Yield |
|---|---|---|
| TILL | Teucrium Agricultural Strategy No K-1 ETF | 52.27% |
| NVDQ | T-Rex 2X Inverse NVIDIA Daily Target ETF | 46.26% |
| OARK | YieldMax Innovation Option Income Strategy ETF | 38.88% |
| QQQY | Defiance Nasdaq 100 Enhanced Options Income ETF Defiance Nasdaq 100 Enhanced Option Income ETF | 38.50% |
Over time, the cash flow generated by those dividend payments can supplement your Social Security and pension income. Perhaps, it can even provide all the money you need to maintain your preretirement lifestyle. It is possible to live off dividends if you do a little planning.
Whether stock ETFs pay monthly dividends usually comes down to the issuer. WisdomTree and Invesco are well-known as monthly payers, but you won't find Vanguard or iShares equity products on the list. It does narrow down the list potential options, but there are some good ones!
ETFs offer advantages over stocks in two situations. First, when the return from stocks in the sector has a narrow dispersion around the mean, an ETF might be the best choice. Second, if you are unable to gain an advantage through knowledge of the company, an ETF is your best choice.
Cons. No guarantee of future dividends. Stock price declines may offset yield.
ETF issuers collect any dividends paid by the companies whose stocks are held in the fund, and they then pay those dividends to their shareholders. They may pay the money directly to the shareholders, or reinvest it in the fund.
Dividend-paying exchange-traded funds (ETFs) have been growing in popularity, especially among investors looking for high yields and more stability from their portfolios. As with stocks and many mutual funds, most ETFs pay their dividends quarterly—once every three months.
| ETF | Dividend yield (trailing 12 months) | Expense ratio |
|---|---|---|
| Global X Nasdaq 100 Covered Call ETF (QYLD) | 11.6% | 0.61% |
| Amplify CWP Enhanced Dividend Income ETF (DIVO) | 4.6% | 0.56% |
| JPMorgan Equity Premium Income ETF (JEPI) | 7.9% | 0.35% |
| Global X MLP & Energy Infrastructure ETF (MLPX) | 5.2% | 0.45% |
How to make $5,000 a month in dividends?
To generate $5,000 per month in dividends, you would need a portfolio value of approximately $1 million invested in stocks with an average dividend yield of 5%. For example, Johnson & Johnson stock currently yields 2.7% annually. $1 million invested would generate about $27,000 per year or $2,250 per month.
If, for example, your portfolio gets to a value of $1.5 million, you could invest in a fund or multiple investments that yield an average of 3.3%. At that rate, you could generate $50,000 in annual dividends.
Dividends can be classified either as ordinary or qualified. Whereas ordinary dividends are taxable as ordinary income, qualified dividends that meet certain requirements are taxed at lower capital gain rates.
Imagine you wish to amass $3000 monthly from your investments, amounting to $36,000 annually. If you park your funds in a savings account offering a 2% annual interest rate, you'd need to inject roughly $1.8 million into the account. This substantial amount is due to savings accounts' relatively low return rate.
| Stock | Forward dividend yield |
|---|---|
| Exxon Mobil Corp. (XOM) | 3.5% |
| Johnson & Johnson (JNJ) | 3% |
| Procter & Gamble Co. (PG) | 2.3% |
| Home Depot Inc. (HD) | 2.4% |
From the perspective of the IRS, the tax treatment of ETFs and mutual funds are the same. Both are subject to capital gains tax and taxation of dividend income.
For instance, some ETFs may come with fees, others might stray from the value of the underlying asset, ETFs are not always optimized for taxes, and of course — like any investment — ETFs also come with risk.
One of the biggest reasons Ramsey cautions investors about ETFs is that they are so easy to move in and out of. Unlike traditional mutual funds, which can only be bought or sold once per day, you can buy or sell an ETF on the open market just like an individual stock at any time the market is open.
ETF trading risk
Spreads can vary over time as well, being small one day and wide the next. What's worse, an ETF's liquidity can be superficial: The ETF may trade one penny wide for the first 100 shares, but to sell 10,000 shares quickly, you might have to pay a quarter spread.
If an ETF is thinly traded, there can be problems getting out of the investment, depending on the size of your position relative to the average trading volume. The biggest sign of an illiquid investment is large spreads between the bid and the ask.
What is better S&P 500 index fund or ETF?
The Bottom Line. Both index mutual funds and ETFs can provide investors with broad, diversified exposure to the stock market, making them good long-term investments suitable for most investors. ETFs may be more accessible and easier to trade for retail investors because they trade like shares of stock on exchanges.
Experts agree that for most personal investors, a portfolio comprising 5 to 10 ETFs is perfect in terms of diversification. But the number of ETFs is not what you should be looking at.
Dividends and interest payments from ETFs are taxed similarly to income from the underlying stocks or bonds inside them. For U.S. taxpayers, this income needs to be reported on form 1099-DIV. 2 If you earn a profit by selling an ETF, they are taxed like the underlying stocks or bonds as well.
You expose your portfolio to much higher risk with sector ETFs, so you should use them sparingly, but investing 5% to 10% of your total portfolio assets may be appropriate. If you want to be highly conservative, don't use these at all.
Holding period:
If you hold ETF shares for one year or less, then gain is short-term capital gain. If you hold ETF shares for more than one year, then gain is long-term capital gain.
