ETFs Made Easy: Dividend Fund Diversity

February 17, 2015

There are plenty of reasons investors like dividend-paying stocks.

At the core of it is simple history: While prices go up and down, there are stocks out there that pay a certain amount in dividends, year after year, often oblivious to whether the S&P 500 Index is up or down. There’s a certain solace in knowing that even if your portfolio is down 5 percent, you’ll still get a dividend check.

That perceived stability is one reason many investors in retirement look to dividend stocks as a source of spendable income. And, in fact, there is academic research backing up the idea that over the long term, dividends may be the most important part of your equity returns.

But when wading into the world of ETFs with the word “dividend” somewhere in their names, things can get a bit confusing.

First, let’s talk about how dividends end up in your pocket if you’re an ETF investor. Imagine you hold an ETF with 100 large-cap stocks in it. Over the course of the year, most of those stocks will likely be paying out dividends, which the ETF manager will collect.

Those dividends come in all the time, on different days, and that ETF manager will generally put that cash to work as it comes in, buying up more stock with those dividend proceeds. The issuers will keep track of the amount of dividends they’ve received, and every so often, they’ll send a distribution out to shareholders of the ETF.

Different funds will send out those distributions at different frequencies. The grand-daddy of dividend ETFs, the Vanguard Dividend Appreciation ETF (VIG | A-69), distributes accumulated dividends quarterly. The Global-X SuperDividend ETF (DIV | B-38) does so monthly. Other firms do it semiannually or even once a year.

But perhaps more important than how frequent the dividends are, is getting a sense of how big they’ll be. And here’s where things can get confusing.

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