Dividend ETFs: What You Need to Know
One of the biggest reservations many people have about investment is the fact that their money will be tied up in stocks that they must sell to realize a profit from. The lack of liquidity of some stocks, however, does not mean that all investments have this drawback.
Many stocks pay dividends, small payments made quarterly or annually on each share you own. Today, thanks to the explosion of online investment, these stocks are often grouped together into what are called Dividend ETFs.
What Are Dividend ETFs and How Do They Work?
ETFs, or electronically traded funds, are investments that group stocks together for investment through a common fund using a digital platform. Dividend ETFs operate the same way, except that these ETFs are made up exclusively of stocks that pay dividends.
When dividends are paid, the payout is transferred directly to the trader’s online brokerage account. From here, the dividends may be withdrawn for cash flow or used to buy more stock. In some cases, dividends can be automatically reinvested into more shares of the dividend-paying stock that produced them.
This type of reinvestment is popular among investors looking to maximize long-term growth, as it creates a portfolio with more shares of the stock and therefore larger future dividend payouts.
How do Dividend ETFs Benefit Investors?
The advantage of an ETF portfolio of dividend-paying stocks depends on how an investor chooses to use his or her dividends. Certainly, taking dividends out of the portfolio as cash flow can help to give an investors a source of regular passive income.
Provided the portfolio is large enough and has had sufficient time to grow, the passive income from a dividend ETF may even be sufficient to pay for an investor’s expenses in retirement. If investors choose to use their dividend payments to buy more shares of stock, on the other hand, a dividend ETF offers the chance for compounding growth of overall net worth over time.
What Are Some of the Best Performing Dividend ETFs?
As with any investment, the risk tolerance of an investor will help to determine what dividend ETF is best. One of the most popular dividend ETFs is the iShares US Preferred Stock ETF. This ETF is made up predominantly of American companies and has historically beaten the market, often yielding returns of over 5 percent.
Another top dividend ETF recently has been the Guggenheim Canadian Energy Income ETF, which delivered some of the highest overall returns of 2016. Most conservative investors, however, will pick reliability over high yields, and so will prefer American blue-chip heavy ETFs.
Dividend ETFs As Part of a Portfolio
Another important aspect of dividend ETFs to consider is how they fit into a broader investment portfolio. Even though dividend ETFs are an attractive investment, it is never wise to put all of your eggs into one basket.
Most investors choose dividend ETFs as a source of liquid income for their retirement years, but still maintain a portfolio of purely equity-based stocks as well to maintain a balanced portfolio.