Dividend ETFs seek to provide high yields by investing in dividend-paying stocks.
These ETFs (exchange-traded funds) typically hold stocks that have a history of distributing dividends to their shareholders. However, it’s important to remember that, unlike the coupon payments on bonds, dividend payments are not guaranteed.
Dividend ETFs can provide a stream of income and long-term growth.
What are the pros and cons of dividend ETFs?
Many investors like the cash flows that dividend ETFs provide. Others believe that the true value of any company depends on its ability to return profits to shareholders via dividends. As you make decisions about your portfolio, it’s important to understand what dividend ETFs can offer and what to watch out for.
• Portfolio diversification.
• Potentially generate a regular revenue stream.
• Payouts may continue even when company earnings are down.
• No guarantee of future dividends.
• Stock price declines may offset yield.
• Dividends are taxed in the year they are distributed to shareholders.
What are some other factors to consider when choosing dividend ETFs?
Dividend ETFs are often categorized by their long-term growth potential or their high-yield potential.
This strategy screens for companies that have a history of increasing dividends over time but may have a lower current yield.
This strategy screens for companies that have the highest current yield but may have unsustainable dividend payment over time.
When selecting dividend ETFs, it's important to understand the fund's strategy (which you can usually find on its website or in its prospectus). The screening process used by the fund to identify dividend-paying stocks and any screens applied to firm quality should be clearly described.
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