Do-it-yourself (DIY) investors who want a little more than just a share of the markets can invest in individual stocks or exchange-traded funds (ETFs) that pay dividends to potentially earn regular income.
Dividends are attractive as investors can use this income to reinvest in the market or use the cash payout for other expenses.
The Deal on Dividends
A dividend is a sum of money paid by a company to its shareholders from the profits it generates.
Dividend-paying companies choose to distribute a portion of after-tax profits, rather than reinvesting those earnings back into the business to reward shareholders for investing in the company or attract new investors.
These payouts typically happen on a regular basis – usually quarterly, bi-annually or annually.
However, these payouts depend on the company’s most recent earnings and a decision by the board of directors to declare a dividend.
The dividend amount also varies, with any increase or decrease in dividend payments related to the company’s financial performance.
Dividend Strategies
Investors can follow different dividend investing strategies based on their objectives. The two main options include:
- A high dividend yield strategy: Target companies with high levels of dividend yield (the annual dividend payment per share divided by the stock price) to offer a high level of dividend income and the opportunity for capital appreciation.
- A dividend growth strategy: Target companies with a history of consistently growing their dividends to increase dividend income over time, with the potential to benefit from capital appreciation.
Broad Exposure to Income-Paying Stocks
While DIY investors can build a portfolio of individual dividend-paying stocks to express their preferred strategy, investing in dividend ETFs offers investors numerous benefits over a stock-picking approach:
- Diversification: A dividend ETF invests in a basket of dividend-paying stocks, giving investors exposure to a wider selection with a single allocation.
- Cost-effective: ETFs typically have lower management fees and operating expenses compared to unit trusts.
- Convenience: ETFs that invest in dividend-paying stocks are a simple one-stop solution for investors seeking income, with the company vetting process already done by the ETF sponsor.
- Liquidity: Dividend ETFs are easy to buy and sell.
- More regular income: ETFs bundle multiple stocks that have a history of distributing dividends to their shareholders, which makes it more likely that investors will get a dividend payout compared to individual stocks.
- Professional management: The best dividend ETFs are managed by experienced and trustworthy asset managers.
Dividend ETF Payouts
Dividends paid from ETFs work similarly to those paid by individual companies.
Like any company that issues a stock dividend, an ETF’s sponsor sets an ex-dividend date, a record date, and a payment date.
- The ex-dividend date: The date that determines whether a new shareholder or buyer is eligible to receive a declared dividend.
- The record date: The date on which you must be a shareholder of the company to receive the dividend.
- The Payment date: The date on which the dividend is paid out to shareholders.
However, the individual stocks held in the ETF may pay dividends at different times and with differing regularity.
As such, the timing of dividend payments from an ETF may follow a different schedule than that of the underlying stocks and is set by the ETF sponsor.
An ETF sponsor may put all dividends it receives from its underlying stock holdings into a non-interest-bearing account until it comes time to make a payout.
Some ETFs may temporarily reinvest the dividends from the underlying stocks into the holdings of the fund until it comes time to make a cash dividend payment.
Dividend ETF Options
Platforms like Clarity, by Investec give self-directed investors easy access to a range of dividend-paying stocks, with the additional option to invest in the best international or local dividend ETFs.
The top dividend ETFs available on the Clarity platform include:
- Schwab U.S. Dividend Equity ETF (SCHD-NASQ): The fund’s goal is to track as closely as possible, before fees and expenses, the total return of the Dow Jones U.S. Dividend 100™ Index. This is a straightforward, low-cost fund offering portfolio diversification with access to quality, sustainable dividends.
- Vanguard High Dividend Yield Index Fund ETF Shares (VYM-NASQ):The fund seeks to track the performance of the FTSE® High Dividend Yield Index, which measures the investment return of common stocks of companies characterised by high dividend yields.
- Satrix Divi Plus ETF (STXDIV-JSE): The fund consists of 30 companies expected to pay the best normal dividends over the forthcoming year. The ETF tracks the FTSE/JSE Dividend Plus Index and should appeal to investors seeking to maximise yield within an equity investment strategy. This ETF will have a low correlation with other indices on the JSE, making it an ideal product for diversifying investment portfolios.
