Exchange-traded funds (ETFs) provide exposure to a wide range of asset classes, industries, and markets, offering an accessible way to invest that's easy to understand. But, as investors looking for an income commonly ask, do ETFs pay dividends?
The good news is that it’s possible to find ETFs that pay dividends, but the payout structure varies based on the type you select.
Dividend-paying ETFs typically invest in companies that distribute dividends. ETF dividends are collected from their holdings and then passed along to investors on a monthly, quarterly, or annual basis. Of course, ETF dividend yield can differ considerably.
Your choice of ETF will depend on your financial priorities and situation.
ETFs That Pay Dividends
Not all ETFs pay dividends; however, those that do distribute income generated from their underlying assets:
REIT ETFs
Real Estate Investment Trust (REIT) ETFs offer the potential for substantial dividend income. By law, REITs must distribute at least 90% of their taxable income to shareholders, making them a reliable source of income.
REIT ETFs aggregate investments in multiple REITs, providing investors with broad exposure to real estate markets while ensuring consistent dividend payouts.
Dividend King ETFs
Dividend King ETFs exclusively invest in companies that have successfully raised their dividends for 50 consecutive years. These ETFs typically feature portfolios comprised of well-established companies with a proven track record of long-term growth and stability.
Dividend Appreciation ETFs
These ETFs concentrate on companies with a robust history of consistent dividend growth. Dividend Appreciation ETFs strike a balance between providing income and pursuing capital growth, making them an ideal choice for investors seeking regular payouts alongside the potential for asset appreciation.
Sector Specific ETFs
Sector-focused ETFs target high-yield industries, providing specific exposure to sectors while delivering attractive dividend payouts.
These ETFs are ideal for investors aiming to capitalise on key economic trends and sector performance. They have the potential to offer some of the highest paying ETF dividends if the targeted sector outperforms the broader market.
Dividend Aristocrat ETFs
Dividend Aristocrat ETFs are built around companies that have consistently increased their dividend payouts over 25 years.
High Dividend Yield ETFs
High Dividend Yield ETFs prioritise income maximisation by investing in stocks with above-average dividend yields. They can include domestic and international companies and are designed for investors seeking ETF high dividend yield income streams.
While these do have the potential for higher payouts, due to the nature of high-yielding assets, they can have a higher risk profile. Investors should evaluate various factors, such as dividend history, yield, and sector focus, to identify the best ETF for dividends.
Types of ETF Dividends
Not all dividends are the same. Broadly speaking, there are two categories of dividend payout: ordinary dividends and qualified dividends. This means it’s essential for investors to understand the differences between the two, and whether ETF dividends are qualified or ordinary.
Ordinary Dividends
Ordinary dividends are payments distributed from the income generated by an ETF. This income can come from various sources, such as interest earned, short-term gains from asset sales, or dividends received from underlying assets that fail to meet the criteria for qualified status.
These dividends are generally taxed as ordinary income, which may result in a higher tax rate depending on your income bracket and location. ETFs that include fixed-income securities, such as mortgage-backed securities or bonds which generate interest rather than qualified dividend income, typically distribute ordinary dividends to investors.
Qualified Dividends
Qualified dividends refer to ETF payouts that fulfil specific criteria. Generally, this involves the ETF holding the underlying stocks for a minimum period, as well as the dividends being issued by eligible companies. Because qualified dividends are often taxed at a lower rate, they can be especially appealing for investors in higher tax brackets.
The best ETF for qualified dividends will often include assets from blue-chip companies with a strong record of dividend payments and stable earnings over many years.
Franked and Unfranked Dividends
Global investors need to understand the distinction between ETF dividends that are qualified or ordinary, with people in some jurisdictions, such as Australia, also needing to consider franked or unfranked dividends.
Franked dividends come with tax credits that offset the taxes already paid by the company issuing them. This feature is advantageous for tax planning, as it mitigates the double taxation on dividend income that some investors might otherwise face.
In contrast, unfranked dividends in certain jurisdictions do not include these tax credits. As a result, investors must consider the full tax burden on any income they earn from unfranked dividends.
ETF Dividend Payment Frequency
ETFs distribute dividends at different frequencies, with monthly or quarterly being the most common, but with some following alternative schedules, such as every six months, or annually.
Monthly ETF Dividends
Monthly ETF dividends are popular with investors, providing a steady and predictable income stream. The best ETF paying monthly dividends will be one that can provide a regular income at the level you require.
Quarterly Dividends
Quarterly dividend payments are the most common schedule for ETFs. These align with the traditional quarterly dividend schedules of many of the stocks held in equity-based ETFs.
Semi-Annual and Annual Payments
Some ETFs may pay dividends less frequently, particularly sector specific, speciality, or international funds. These are less common and are generally better suited for longer-term growth strategies rather than regular income needs.
Taxes on ETF Dividends
ETF dividends tax is influenced by the jurisdiction of the investor and their residency status. Other factors include whether the dividends are considered ordinary or qualified, as well as the investor’s tax bracket.
ETF Dividend Taxes in the United States
In the U.S., ETF dividends are taxed based on whether they are classified as qualified or ordinary:
- Qualified Dividends: These dividends are taxed at long-term capital gains rates, which are generally lower than ordinary income tax rates.
- Ordinary Dividends: These are taxed at the investor's standard income tax rate.
- Dividend Withholding Tax: U.S. investors don’t typically face withholding tax on dividends paid by U.S.-based ETFs. Foreign ETFs may impose withholding taxes on dividends, which can sometimes be credited to U.S. tax returns.
ETF Dividend Taxes in Canada
Dividend income is subject to taxation, but provisions are in place to reduce the effective tax rate on dividends from Canadian companies:
- Canadian Dividends: Dividends from Canadian companies receive a dividend tax credit, which reduces the overall tax burden on those earnings.
- Foreign Dividends: Dividends from foreign ETFs are subject to withholding taxes by the foreign government. Treaties are in place with some countries to reduce this tax.
ETF Dividend Taxes in the United Kingdom
In the UK, ETFs and dividends are subject to taxation, but there is a dividend allowance that may reduce the amount of tax owed:
- Dividend Tax: For the 2024/25 tax year, the UK offers a £500 tax-free dividend allowance. Dividends above this amount are taxed at different rates based on the investor's income.
- Foreign Dividends: UK residents may face a withholding tax on foreign dividends that depend on the country where the ETF is domiciled. The UK has treaties with many countries that may reduce this tax.
ETF Dividend Taxes in Australia
ETF dividends tax in Australia operates through a system known as franking. Franked dividends are those where the company has already paid tax on the income. To reflect this, shareholders are given a tax credit on their dividend payment:
- Franked Dividends: If an Australian ETF holds shares in Australian companies, the dividends may be franked. This means tax has already been paid by the company, and the investor receives a tax credit for that tax.
- Unfranked Dividends: If the ETF holds international shares or foreign investments, the dividends are typically unfranked and may be subject to withholding taxes by the country of origin.
- Withholding Tax: Australia generally imposes a withholding tax on dividends paid by foreign entities. The rents vary depending on where the entity is domiciled.
How to Invest in Dividend ETFs with ActivTrades
ActivTrades allows you to invest in more than 1000 products, including dividing paying ETFs. Whether you’re looking for S&P 500 ETF dividends, gold ETF dividends, or ETF bond dividends, you can trade ETFs on our next generation trading platform.
It’s easy to get started. Simply follow these three simple steps to begin investing in ETFs for income and long-term growth:
- Step 1: Open an Account
The first step is to create an account. Simply visit the ActivTrades website, sign up, and complete the registration process. You'll need to provide some personal information and verify your identity.
- Step 2: Fund Your Account
Once your account is set up, you will need to fund it. ActivTrades allows you to deposit funds into your account using various payment methods, including credit/debit cards, bank transfers, and e-wallets.
- Step 3: Choose Your ETFs and Start Trading
Now that your account is funded, it’s time to choose the ETFs you want to invest in. ActivTrades provides access to various dividend-paying ETFs, including stocks, commodities, and bond ETFs. Once you’ve made your choices, you can execute your trades with just a few clicks.
Frequently Asked Questions
What are ETFs?
ETFs (Exchange-Traded Funds) are investment funds that trade on stock exchanges, offering exposure to a wide range of assets like stocks, bonds, or commodities.
What are ETF dividends?
ETF dividends are payments made to investors from the income generated by the assets held in the ETF, such as stock dividends or bond interest.
How often are ETF dividends paid?
ETF dividends are generally paid quarterly, although some ETFs pay monthly or semi-annually depending on the structure of the fund. Some specialist and international funds pay annually.
Are ETF dividends taxed?
Yes, ETF dividends are subject to taxes, which vary by country and whether the dividend is classified as ordinary or qualified.
Can You Reinvest ETF Dividends?
Yes, many platforms allow you to select automatic dividend reinvestment into your chosen ETF.
How do I choose the best ETF for dividends?
Look for ETFs with high dividend yields, a reliable payout history, and low management fees. It’s also important to consider the ETF’s underlying assets, and how it aligns with your overall investment strategy.
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