Do ETFs Pay Dividends?

Learn how dividend ETFs work and how they are taxed.

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Research Lead
Reviewed by: Kent Thune
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Edited by: Kent Thune

There are many types of ETFs that invest in dividend stocks, but do ETFs pay dividends?

Learn how dividend ETFs work, how they are taxed and how investors use them for various investment strategies.

Do ETFs Pay Dividends?

If you’re wondering if ETFs pay dividends, the short answer is yes. ETFs pay dividends if they hold stocks that pay dividends.

However, not all ETFs pay dividends. For example, fixed income ETFs pay interest, not dividends.

Types of ETFs that pay dividends are:

  • Dividend appreciation ETFs: Track an index of stocks that have a history of increasing dividends over time.
  • High dividend yield ETFs: Track an index of stocks that tend to pay out higher dividends than the average dividend stock.
  • Dividend aristocrat ETFs: Invest in stocks of companies that have increased their dividends in each of the past 25 years.
  • Dividend king ETFs: Invest in stocks of companies that have increased their dividends in each of the past 50 years.
  • REIT ETFs: Invest in real estate investment trusts, hence the REIT initialism. REITs own income-producing real estate properties and are required to pay out at least 90% of income in the form of dividends to shareholders each year.
  • Sector ETFs: Certain industrial sectors, such as telecommunication services, financials, utilities and energy, tend to include stocks of companies known to pay dividends.

How Do ETF Dividends Work?

Dividend ETFs are income-based funds that typically invest in stocks of companies that pay high or stable and growing dividends. Most dividend ETFs seek to track the performance of a dividend index consisting of dividend-paying stocks. The way dividend ETFs work is the ETF collects dividends paid out from the stocks it holds and distributes the dividends to the ETF’s shareholders.

ETF dividends may be paid quarterly, or at some other frequency, depending on the ETF. From the investor’s perspective, dividends may be received as income, or the investor may choose to have the dividends automatically buy more shares of the dividend ETF.

Types of ETF Dividends

The types of dividends paid out by ETFs may be either ordinary or qualified dividends. It’s important for investors to understand these two types of dividends because they determine how the dividend ETFs are taxed.

  • Ordinary dividends: Taxed at an investor’s ordinary income tax rate, which depends on the investor’s tax bracket. They are also called nonqualified dividends because they don’t qualify for the lower rate of qualified dividends. A REIT ETF is an example of a dividend ETF that pays nonqualified dividends.
  • Qualified dividends: Taxed at the lower capital gains rate, which ranges from 0% to 20%. Most types of dividend ETFs pay qualified dividends.

Like other types of ETFs, dividend ETFs may distribute capital gains from the fund. Although these types of distributions are not common with ETFs, they are taxable to the shareholder, even if they did not sell shares. Profits gained by an ETF shareholder after selling shares may also be taxed at the capital gains rate, which ranges from 0% to 20%.

How to Find Dividend ETFs

The dividend ETFs channel on ETF.com can be an efficient way for an investor to begin their search for dividend ETFs. Here investors can easily sort through over 150 dividend ETFs by issuer, assets under management (AUM), expense ratio, three-month trailing return or a specific segment, such as U.S. equity, large cap or high dividend yield.

On this channel, investors may also quickly view a short list of top dividend ETFs identified as top-performing dividend ETFs, AUM winners, AUM losers and more.

Bottom Line

Whether you’re looking for income from your investments or you want to invest in dividend stocks for long-term growth, these ETFs can be a smart addition to your portfolio.

Before investing in dividend ETFs, be sure to learn how ETF dividends are taxed, and if these unique ETFs fit your risk tolerance and investing goals.

Kent Thune is Research Lead for etf.com, focusing on educational content, thought leadership, content management and search engine optimization. Before joining etf.com, he wrote for numerous investment websites, including Seeking Alpha and Kiplinger. 

 

Kent holds a Master of Business Administration (MBA) degree and is a practicing Certified Financial Planner (CFP®) with 25 years of experience managing investments, guiding clients through some of the worst economic and market environments in U.S. history. He has also served as an adjunct professor, teaching classes for The College of Charleston and Trident Technical College on the topics of retirement planning, business finance, and entrepreneurship. 

 

Kent founded a registered investment advisory firm in 2006 and is based in Hilton Head Island, SC, where he lives with his wife and two sons. Outside of work, Kent enjoys spending time with his family, playing guitar, and working on his philosophy book, which he plans to publish in the coming year.