Most of us are familiar with exchange traded funds as passive funds which track the underlying index to generate returns. However, very few are aware about dividend yielding exchange traded funds. The dividend paying process is pretty much simple, these ETFs invest in the underlying securities of dividend paying stocks and when these stocks roll out dividends, the fund manager collects them distributes it to mutual fund investors who have invested in dividend paying ETFs. Investors can either opt for a dividend distribution plan or they can even consider dividend reinvestment option where the money is invested back in the scheme and may allow an individual’s investments to benefit from power of compounding.
Why dividend ETFs?
As mentioned earlier, dividend ETFs are meant to invest in a basket of stocks that have the potential to yield decent dividends. The reason dividend ETFs exist is so that retail investors get a chance to earn some dividends by investing in passive funds like ETFs. These funds only invest in stocks that may offer exceptional dividends to investors. Apart from dividend yielding stocks, these ETFs may also invest in real estate investment trusts (REITs).
Depending on the fund manager’s decision and asset allocation strategy of the scheme, the portfolio dividend ETF may consist of regional as well as global dividend stocks. The indices which these dividends track for income generation are known for providing above-market dividend yields and much more liquidity than normal ETFs.
Benefits of investing in dividend ETFs
Dividend ETFs are passively managed funds which means that investors have to pay a low expense ratio for owning these funds. A passively managed fund usually has a low expense ratio as compared to active funds where the fund manager has more involvement than and is actively involved in buying and selling securities to help the scheme achieve its investment objective. However, the underlying benchmark or index which the ETF tracks majorly covers those companies that have a proven track record of providing regular dividends. Dividend yielding ETFs may also invest in bluechip company stocks that are anticipated to less risky than mid and small caps.
A low expense ratio means investors can achieve higher capital appreciation than those funds that levy a high expense ratio. Also, ETF units can be traded at the stock exchange just like the stocks of publicly listed companies. This makes them more liquid than other mutual funds like ELSS (Equity Linked Savings Scheme) which comes with a predetermined lock-in period and investors cannot sell units of this fund for at least three years.
Which ETF funds have offered high dividends?
Of all the ETFs, equity ETFs have delivered good returns in the past. Investors must not only look a fund’s past performance before investing. This is not an apt way to invest in mutual funds as past performance of a scheme doesn’t determine its future performance. Investors who are new to investing and need further assistance in making an informed investment decision should seek professional consultation-.