Investing in Dividend ETFs (Exchange-Traded Funds)

Exchange-traded funds (ETFs) trade on stock exchanges and hold assets like stocks and bonds as their underlying securities. ETFS typically trade at about the same price as the value of the underlying assets (the net asset value). A Dividend ETF invests in a basket of dividend-paying stocks to provide a high-yield investment vehicle. Well-diversified dividend ETFs that carry stable companies that have a history of paying consistent dividends can present a good investment option in turbulent economic times.

Why Some Companies Pay Dividends

Investors can earn a return on their investment through capital gains (price appreciation) or through the income provided by dividends. After a company has become profitable, it may choose to pay its investors a dividend through the free cash flow it has generated. Free cash flow is the amount of cash the company has left after it has allocated what it must back into the business. A dividend payout is viewed as important to many investors as dividends can provide a sense of certainty over the company’s stability. Dividend payments will attract investors who are looking to secure current income.

Dividend-paying stocks, especially those of companies that have a history of increasing dividends tend to perform well in an uncertain economic climate. These stocks can benefit investors through increased yield and an increased share price that can follow the higher yield.

About Dividend ETFs

Like other ETFs, a dividend ETF is passively managed with low fees and can be bought and sold during trading hours on the major exchanges. Investors may choose to sell dividend ETFs short, purchase them on margin and buy as little as one share if they like. Commission fees for ETFs are generally in line with commissions charged for stock trades. Some dividend ETFs hold U.S. domestic stocks only while others have an international focus. Most contain stocks with above-average dividend yields and high levels of liquidity.

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The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.

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