Dividend exchange traded funds (ETFs) can be a great way to add
some stability and income to your portfolio. That aside, they still
do need a little understanding before you jump in.
An ETF that owns stocks will collect the dividends based on the
number of shares of the underlying companies it owns over the
course of time,
explains Michael Rawson for Morningstar
Dividend ETFs: Looking for a Little More
These dividends are gathered and then get paid out to
shareholders. But how are these amounts figured? [
3 Approaches to Dividend ETF Investing.
Rawson sheds some light:
is represented by the sum of all dividends paid by the fund
over the past 12 months, divided by the previous month-end
net asset value (
- When researching a dividend yield, there are two numbers that
come up: an average dividend yield and a dividend yield.
The difference between the fund's dividend yield and the weighted
average dividend yield on the underlying stocks in the portfolio
is calculated, which is deducted from dividends before they are
paid out to shareholders.
- In order to receive a dividend, you must be the registered
owner of the fund by the record date. Because ETF trades take
three days to settle, you need to buy the fund before then to
receive the next dividend.
- However, that doesn't mean you can buy the fund just before
the ex-date to get extra dividends. The NAV of the fund will
adjust downward by the amount of the dividend, so any gain you
get from receiving an extra dividend will be offset by a decline
in the NAV, at least in an efficient market.
Tisha Guerrero contributed to this article.