Definition: A dividend ETF, or exchange trading fund, mirrors the movement of a dividend stock index seeking to provide high returns by investing in a set of high dividend paying securities. In other words, it’s a fund that invests in high dividend paying companies.
What Does Dividend ETF Mean?
What is the definition of dividend ETF? Dividend ETFs invest in domestic stocks or in global stocks, following indexes that contain securities with high liquidity and above-average dividend yields. There are indexes that follow blue chip stocks while others focus on smaller, growth-oriented companies.
Often, the same stocks appear on more than one dividend stock-index, and many dividend-stock indexes follow companies in the same sector or industry. Dividend ETFs offer diversification, high portfolio turnover, and segmented investing strategies while incurring lower fees than other investment vehicles such as equities and mutual funds.
Let’s look at an example.
Benjamin invests $30,000 in dividend ETFs. The indexes he selects have a dividend yield of more than 3%, which is considered the milestone for a high dividend yield. Benjamin spreads his $30,000 across 20 different stocks included in the dividend-stock indexes targeting an initial value of $1,500 per holding.
Each time Benjamin completes a trading, he incurs a 3% fee. On the other hand, he sees remarkable returns as the indexes track blue chip stocks of companies that are leaders in the field.
Benjamin is not a risk-averse investor. He seeks for high returns, aiming to create a steady stream of income. If he was a small investor with, let’s say, $10,000 to invest in those dividend-stock indexes, it would be difficult to seek a profit while incurring such high fees. Either he should change the selected indexes or turn to the equity market.
In any case, ETFs provide about 25% diversification by sector or industry, thus covering the entire market, leveraging volatility, and investment risk. On the other hand, ETFs are not recommended for risk-averse investors that seek to preserve their capital.
Define Dividend ETF: Dividend exchange trading funds are investment funds that specifically invest in dividend producing securities.