Do ETFs automatically reinvest dividends?
Automatic dividend reinvestment plans (DRIPs) directly from the fund sponsor aren't yet available on all ETFs although most brokerages will allow you to set up a DRIP for any ETF that pays dividends. This can be a smart idea because there's often a longer settlement time required by ETFs.
Transfer to a Vanguard® fund.
Use our Directed Dividend Plan to have your dividends and/or capital gains distributions reinvested automatically in shares of another identically registered Vanguard holding.
What happens to the dividends of the underlying stocks? Dividends received by an ETF are typically reinvested in the Fund.
Dividends are taxable regardless of whether you take them in cash or reinvest them in the mutual fund that pays them out.
- Trading fees.
- Operating expenses.
- Low trading volume.
- Tracking errors.
- The possibility of less diversification.
- Hidden risks.
- Lack of liquidity.
- Capital gains distributions.
For popular S & P 500 index funds, you get a 2% dividend every year. You can reinvest it to the same fund and see a compounding effect. On top of this, you need to pay tax on this 2% dividend.
Vanguard S&P 500 ETF (VOO)
VOO has a dividend yield of 1.32% and paid $6.36 per share in the past year. The dividend is paid every three months and the last ex-dividend date was Dec 20, 2023.
Types of dividends
Moreover, the investor must own the shares in the ETF paying the dividend for more than 60 days during the 121-day period that begins 60 days before the ex-dividend date. This means if you actively trade ETFs, you probably can't meet this holding requirement.
| Symbol | Name | Dividend Yield |
|---|---|---|
| RATE | Global X Interest Rate Hedge ETF | 32.04% |
| AMDY | YieldMax AMD Option Income Strategy ETF | 29.38% |
| FBL | GraniteShares 2x Long META Daily ETF | 28.04% |
| IWMY | Defiance R2000 Enhanced Options Income ETF | 26.54% |
The largest high dividend yield ETF is the Schwab U.S. Dividend Equity ETF (SCHD). The Vanguard High Dividend Yield ETF (VYM) is also a popular high dividend yield ETF.
Do you pay taxes on ETFs if you don't sell them?
If you hold these investments in a tax-deferred account, you generally won't be taxed until you make a withdrawal, and the withdrawal will be taxed at your current ordinary income tax rate. If you invest in stocks and bonds via ETFs, you probably won't be in for many surprises.
For most ETFs, selling after less than a year is taxed as a short-term capital gain. ETFs held for longer than a year are taxed as long-term gains. If you sell an ETF, and buy the same (or a substantially similar) ETF after less than 30 days, you may be subject to the wash sale rule.
Vanguard S&P 500 ETF holds a Zacks ETF Rank of 2 (Buy), which is based on expected asset class return, expense ratio, and momentum, among other factors. Because of this, VOO is a great option for investors seeking exposure to the Style Box - Large Cap Blend segment of the market.
ETFs are most often linked to a benchmarking index, meaning that they are often not designed to outperform that index. Investors looking for this type of outperformance (which also, of course, carries added risks) should perhaps look to other opportunities.
Liquidation of ETFs is strictly regulated; when an ETF closes, any remaining shareholders will receive a payout based on what they had invested in the ETF. Receiving an ETF payout can be a taxable event.
In contrast, the riskiest ETF in the Morningstar database, ProShares Ultra VIX Short-term Futures Fund (UVXY), has a three-year standard deviation of 132.9. The fund, of course, doesn't invest in stocks. It invests in volatility itself, as measured by the so-called Fear Index: The short-term CBOE VIX index.
Can you live off ETF dividends? While it is possible to live off ETF dividends, you'll need to do some careful planning to make it happen. You'll need to balance how much income your investments bring in, and how much you spend.
Just as like any stock shares, the price of an ETF often rises before the ex-dividend date—reflecting a flurry of buying activity—and falls afterward, as investors who own the fund before the ex-dividend date receive the dividend, and those buying afterward do not.
Despite being a large, mature, and stable company, Berkshire Hathaway does not pay dividends to its investors. Instead, the company chooses to reinvest retained earnings into new projects, investments, and acquisitions.
Yields from 2% to 6% are generally considered to be a good dividend yield, but there are plenty of factors to consider when deciding if a stock's yield makes it a good investment.
What is the average return on the S&P 500 dividends?
The average yearly return of the S&P 500 is 10.04% over the last 30 years, as of the end of December 2023. This assumes dividends are reinvested. Adjusted for inflation, the 30-year average stock market return (including dividends) is 7.32%.
If you own stocks through mutual funds or ETFs (exchange-traded funds), the company will pay the dividend to the fund, and it will then be passed on to you through a fund dividend.
Not all ETF dividends are taxed the same; they are broken down into qualified and unqualified dividends. Qualified dividends are taxed between 0% and 20%. Unqualified dividends are taxed from 10% to 37%. High earners pay additional tax on dividends, but only if they make a substantial income.
Nearly all leveraged ETFs come with a prominent warning in their prospectus: they are not designed for long-term holding. The combination of leverage, market volatility, and an unfavorable sequence of returns can lead to disastrous outcomes.
Exchange-traded funds (ETFs) can serve a range of investment horizons, and they are flexible enough to be used for both short-term and long-term investment strategies. The choice of how long to stay invested in ETFs depends on your individual financial goals, risk tolerance, and investment strategy.
