What is a Dividend ETF?

What is a Dividend ETF?

Dividend ETFs invest primarily in preferred stock and stocks that pay regular dividends. Strategically, they tend to be either Dividend Appreciation or High Yield.

Dividend ETFs are equity dividend funds that seek income from preferred stocks, common stocks. As of 2016 there are over 130 Dividend ETFs, and that’s up from about 29 in 2011 and 45 in 2012. This has become a popular strategy, obviously, and they all seek to distinguish themselves from the pack.

Some fall into the Dividend Appreciation category and some fall into the High Yield Category. The dividend appreciation funds select stocks based on their history of increasing dividend payouts in recent years. These tend to be higher quality, safer funds than their high yield counterparts, but sometimes it is the case that after raising a dividend for so long, companies are less likely to keep that rate of growth up.

The high yield dividend ETF category seeks stocks with the highest yield they can get without risking too much. It is often the case that companies who seek to entice investors with high yield securities are actually hurting for cash and have taken on too much debt.

Statistically if a fund only invests in the highest yielding stocks, that fund would not perform as well in the long run compared to a fund which chose stocks that had a slightly lower yield and made more prudent decisions with their company selection.

It is also noteworthy that ETFs tend to be slightly less efficient at dividend reinvestment than mutual funds due to their structural differences, but most ETFs have lower fees than mutual funds and can trade intra-day.

Despite the fact the dividends tend to be taxes at income tax rates, ETFs also may offer investors an insulation from these taxes, more than mutual funds can, also due to their structure.