Do all ETFs pay dividends?

If you’re an old hand at trading, you might already be familiar with dividends.

If not, dividends are regular payments that are distributed among shareholders – usually every quarter. These payments come from the profits made by the company, and they’re designed as a kind of reward for the people who hold stocks in that company. You can read all about these payments in our guide to dividends .

Not all companies pay dividends, but many do. The same goes for exchange-traded funds (ETFs). While many ETFs don’t offer dividends, a good portion of them provide regular payouts to holders. Whether or not an ETF pays dividends really depends on what’s inside the ETF. It might contain a basket of dividend-paying stocks, or it may only include those focused on growth.

The dividends are usually combined into a single payment from all the dividend-paying stocks within the ETF. We go into more detail on how ETFs pay dividends right here .

Why don’t some ETFs provide dividends?

For companies, there are numerous advantages to paying dividends. Not only can they reward their shareholders, but they can also present a positive image for both current and prospective shareholders. Dividends make companies look more stable, more lucrative, and better performing.

They can also be advantageous for shareholders. Dividends have the potential to provide a regular stream of income, which could be used to cover living expenses or to reinvest.

In the case of an ETF – which might contain numerous dividend-paying stocks – the benefit is that the shareholder is receiving a regular, diversified payment. Because the dividend is coming from several different stocks, it has the potential to be more consistent – even if one of those stocks suddenly stops dividend payments.

But, there are also reasons why a company may choose not to offer dividends to shareholders. Instead, these companies choose to reinvest their profits to focus on growth, potentially leading to a longer-term gain in share value for shareholders.

This generally applies to ETFs, too. Those that contain growth-focused companies or stocks still in the process of gaining momentum, or ETFs that invest in certain sectors (such as energy or healthcare), may not provide dividends.

However, these ETFs can still have their advantages. If and when the ETF’s value goes up, shareholders may be able to sell their stake for a higher price.

What is a high-dividend ETF?

Now let’s cut to the crux of this article: high-dividend ETFs (AKA high-yield ETFs).

These kinds of ETFs contain a bundle of stocks that tend to pay higher dividends than others. This investment strategy is usually reflected in the ETF’s name – you might see it referred to as ‘high yield’, ‘high dividend’, ‘high dividend yield’, ‘maximiser’, or simply, ‘yield’.

While high-dividend ETFs may look attractive, they’re not without their risks. More on that further down.

On the other hand, some ETFs deliver lower yields but are focused on consistent payments – potentially meaning they’re more stable for investors.

7 tips for finding high-dividend ETFs

So, how can you seek out the ETFs that deliver the highest dividends? We’ve put together some handy tips, as well as a few considerations.

1. Search for ETFs that explicitly provide dividends

You can use your broker to search for ETFs that specifically deliver dividends. In fact, simply typing ‘dividend’ into Pearler’s share search gives you several results.

Within those results, look for the keywords we mentioned earlier – like ‘high yield’ or ‘high dividend’.

2. Gauge the ETF’s dividend yield

Beyond its name, another good way to investigate an ETF’s dividend performance is to look at its dividend yield. This is shown as a percentage, revealing the amount an ETF typically pays in annual dividends in relation to its price.

High-dividend ETFs often sit above 5%, but ultra-high ones may offer 10% or more.

3. Look at the stocks within the ETF

The nature of an ETF means there will be multiple holdings within a single fund. These could be small, medium or large-sized companies, and each comes with its own possible advantages and disadvantages.

ETFs with smaller companies may promise higher dividend yields (or capital growth), but they’re generally riskier. Those with larger ones might deliver slightly lower dividends but the benefit is that they’re often safer. This can potentially mean that your dividend income is less likely to shift.

4. Assess the ETF’s fundamentals

The dividend yield is a fairly simplistic way of assessing an ETF’s performance, but you also want to look at some of its fundamentals: its historical returns, its fees and its prospectus.

As far as returns go, explore the ETF’s long-term historical performance – say, five years or so. While past performance isn’t always an indicator of future performance, it can give you an idea of the ETF’s success.

Fees are another crucial factor to consider. While not always the case, many dividend ETFs have higher fees because there’s more work that goes into them. This work is primarily around analysing and picking the right stocks .

And lastly, take the time to properly read an ETF’s prospectus. This document provides insight into what it holds, its strategy, its methodologies, its performance, and its possible risks. Understanding the prospectus can help you differentiate different dividend ETFs and look for factors that might impact their dividend yield.

5. Understand the risk of high-yield ETFs

Generally speaking, higher-yield ETFs are often riskier. They can be less stable and sustainable, and, at times, may indicate an issue with the ETF or the stocks it holds.

For example, a high yield could be a result of decreasing share prices within the ETF. This may be due to a company’s underperformance or a sign that the company’s dividends may soon be reduced or cut entirely. As a result, both your dividend income and the overall value of the ETF could go down.

It's worth noting that several ETFs do contain historically high-dividend stocks coupled with low volatility – such as the Vanguard High Dividend Yield Index ETF . These ETFs tend to focus on larger companies (or indexes that track larger companies) known for providing a high dividend yield but with a proven track record of stability.

6. Check out investing resources

There are numerous resources online that document the highest-paying dividend ETFs. They usually go on a year-by-year or month-by-month basis (for example, ‘the best high-dividend ETFs of 2023’ or, more specifically, ‘the top-performing high-dividend ETFs of December 2023’).

Keeping up-to-date with these can help you seek out the ETFs that are currently paying the biggest dividends.

Again, though, try not to be too swayed by periodic performance. Use the tips we mentioned earlier to thoroughly assess a dividend ETF before choosing to invest in it.

7. Remember that dividends can fluctuate

Investing in a single dividend-paying stock could mean variable payments from year to year, depending on the company’s performance.

But the whole point of investing in an ETF is that it gives you diversified exposure to numerous stocks within one fund. From a dividend perspective, this can be beneficial if you’re looking for a more stable source of income.

That being said, it’s always worth keeping in mind that even ETF dividends can fluctuate (although, perhaps, not as much as individual stocks). This is because ETFs are prone to shifts in the market just like stocks. Plus, the stocks within a particular ETF are constantly being traded, resulting in changes in their value.

However you choose to invest, always ensure you do your research. That way, whether you choose a dividend or a growth ETF, you'll know you've made the right choice for your goals.