Settlement Rules Create Gaps
There’s always a gap between the ex-date and the payment date, because settlement, record checking and payment processing take time. It takes custodians and brokers a few days to verify the cash payments, resolve ownership and deliver certification.
ETF record dates are generally two days later than mutual-fund record dates. This means ETF payment dates come two days later than mutual fund payments.
When Four Days Turn Into Eight
It gets worse: Issuers can sometimes extend this waiting period by adding days between the record date and the payment date. Check out the September dividend payment schedules for three top-yielding funds.
The SPDR S&P International Telecommunications Sector ETF (IST | C-62) went ex-dividend on Sept. 19, 2014, with the record date two business days later on Sept. 23, and the payable date delayed until Oct. 1—a full six business days later. That’s an eight-business-day delay.
The iShares Mortgage Real Estate Capped ETF (REM | B) most recently went ex-dividend on Sept. 24, 2014. The record date was Sept. 26, with payment two business days later on Sept. 30. That’s a speedy four-day delay.
The ProShares Global Listed Private Equity ETF (PEX | F) had the same ex-dividend and record dates as REM, but didn’t pay the distribution until Oct. 2, four business days later. That’s a six-day delay.
Brokerages Add Convenience, But Some Extend The Wait
Getting the cash from your ETF distribution is a good start, but you won’t have reinvested anything until you use that cash to buy more ETF shares.
Some brokerages, including TD Ameritrade, Vanguard, Scottrade, Schwab and, to a lesser extent, Etrade, offer ETF DRIPs—no-cost dividend reinvestment programs. This is very helpful for busy clients. Other brokerages, such as Fidelity, leave ETF dividend reinvestment to their clients.
Some firms will “DRIP” all ETFs, but others are more selective. Vanguard and Schwab will DRIP almost all ETFs; TD Ameritrade will reinvest dividends in all but the most illiquid funds. Scottrade reinvests dividends on “most” ETFs, but doesn’t handle fractional shares. Etrade will DRIP a few ETFs, but doesn’t make its list public, though it did tell me “most are not eligible.”
There’s variety in how long each brokerage firm waits to buy new shares with the dividend money. Vanguard reinvests dividends on the payable date, on the opening.
Etrade waits until it has confirmation that the cash has been deposited, which happens generally around 10 a.m. ET on the payment date. Schwab and TD Ameritrade wait until the following day, adding more price uncertainty. Scottrade pools dividend income and reinvests monthly or quarterly, executing at 2 p.m.