This is how you get paid regularly

Those who invest money in shares can also share in the company’s profits. It’s even easier with dividend ETFs. Here you can read everything you should know about it.

When investing, investors often pay attention to Buy stocks of companieswho let their shareholders participate in the company’s profits, that is distribute a dividend.

But that is also possible when investing with so-called ETFs, passive equity funds that replicate a stock index like the Dax. If so, be sure to invest in dividend ETFs.

But what is that anyway? Why can this be worthwhile for me? And what else do I have to consider? You can find out everything you need to know about dividend ETFs in our overview:

What are dividend ETFs anyway?

A dividend ETF is an index fund that only considers stocks of companies that have paid dividends to their shareholders in the past. To understand this in detail, you first need to know what an ETF is – and what a dividend is:

ETF: An ETF is usually a special equity fund. You can think of an equity fund as a kind of basket containing many different stocks. What is special about the ETF: In an ETF, a computer algorithm simulates a stock index like the Dax. This means that exactly the same company shares are in this basket as in the stock index it tracks.

An example: With a Dax ETF, you invest in shares of the 30 largest companies on Deutsche Börse in one fell swoop. These are companies like BMW, Lufthansa or Deutsche Post.

Dividend: A dividend is the part of the Profit of a stock corporationthat the company pays out to investors, i.e. its shareholders. A dividend is always calculated down to the individual share.

Whether and how much dividends a company pays out depends on several factors. For example, it is crucial how high a company’s profit is.

An example: The insurer Allianz paid a dividend of nine euros per share in 2019. So if you owned ten Allianz shares, you would have received $ 90. Taxes or fees are not included in the example.

Important: Public companies are not obliged to pay a dividend. It is also possible that a company needs the money for a takeover or some other large investment that can benefit the company and thus also the shareholders in the long term. The board of directors of a company can therefore propose that it distribute little or no dividend to its shareholders. Many American tech companies such as Apple or Amazon, for example, paid no dividends at all for a long time – because they needed the money to grow.

As a rule, the dividend decides once a year General meeting, the meeting of the shareholders of a company. Companies that have kept their dividends constant or even increased them for years call stock exchange experts “dividend aristocrats” or the “dividend nobility”.

Dividend ETF: A dividend ETF tracks a stock index that only contains dividend companies. Correspondingly, companies that paid little or no dividends to their shareholders in the past are not taken into account.

An example: A well-known stock index that only contains dividend companies is called the DivDax. This includes those companies from the Dax, the leading German index, that pay a particularly high dividend. These are companies like Daimler, VW or BMW – but also Allianz. Henkel, on the other hand, does not appear in the index, as the company recently only paid a mini dividend per share.

What does a dividend ETF bring me?

With a dividend ETF, you can take advantage of when a company pays out its profits. However, it’s important to distinguish between two basic dividend ETFs:

Accumulating Dividend ETFs: Accumulating means that the ETFs do not pass the dividends on to the investors – they reinvest them. This can be of interest to you as an investor because your investment capital increases without you having to pay in more money yourself. That particularly affects the so-called Compound Interest Effect from: Your invested money increases all the more when income that was previously generated is added.

Distributing dividend ETFs: In contrast to accumulating dividend ETFs, distributing ETFs pass the dividend profits directly on to you as an investor. The advantage: you receive a certain amount on a regular basis. However – and this is the disadvantage – you benefit less from the so-called compound interest effect.

To clarify the difference between the two types of ETF, let’s assume that you invest 5,000 euros once over a period of 15 years. The assumed annual Yield, called yield, is six percent in this example.

We assume an annual dividend of 300 euros over 15 years. The total sum of the dividends thus amounts to 4,500 euros. For the sake of simplicity, let’s assume that you deposit and invest the payment with the accumulating ETF annually. With a distributing ETF, you receive the dividend payment – without having to invest it again. The example shows: The final amount in the case of a dividend reinvesting ETF is significantly higher than that of one that pays you the dividend.

Figures in eurosAccumulatingDistributing
Dividend (total)4,5004,500
final amount19,384.5516,482.79

Benefits of dividend ETFs:
An ETF is generally very cheap compared to an actively managed fund. The risk is also broadly diversified. With an accumulating dividend ETF, your investment capital increases – without you having to pay in more. A distributing dividend ETF, on the other hand, guarantees you regular payouts.

There are also minor differences depending on the type of dividend ETF for the Taxation of Income. The amount of the tax burden is now approximately the same, but the timing is different.

How do I find the best dividend ETFs?

To find the best dividend ETFs, you should compare different ETFs on internet portals. Since the selection is very large, the following criteria help with the selection:

  • Costs: Here is the total expense ratio, for short TER) preferably information. It contains the annual percentage costs that a fund company deducts from the investment amount for offering the fund. ETFs – also known as dividend ETFs – cost a lot less than active funds, as there is no need to pay a manager to control stock trading. You also need to pay attention to execution costs or order fees. That’s the payment you make every time you invest in a dividend ETF.
  • Distribution type: The decisive factor here is whether you would prefer to invest in an ETF in which you regularly receive the dividend as a payout to your account (distributing), or in which you can benefit even more in the long term (accumulating). So you have to be aware of the type of payout you want to bet on (see above).
  • Dividend amount: It is very important how much your dividend will be when you invest in this particular ETF. This is crucial both when the dividend is distributed and when it is reinvested directly.

Here is a selection of some well-known dividend ETFs:

What are the risks of dividend ETFs?

Basically, the same applies to dividend ETFs as to conventional ETFs: The diversification is usually very broad, and the portfolio of stocks in the ETF is large. After all, you also invest in dividend ETFs in whole stock indices – and not just in individual stocks.

However – and this is important – the spread of dividend ETFs is often not quite as high as that of other ETFs. This is because ETFs track a stock index that only contains company shares that offer a high dividend (see above). Ultimately, you invest in fewer companies than with a traditional ETF.

Many indices that track dividend ETFs are still relatively new. For you as an investor, this means that you often do not have a long look back into the past. This is not how you can easily estimate the profit potential.

Tip: Find ETFs that track a dividend index that is at least ten years old.

Is the dividend paid monthly?

No. In the case of European stock corporations, the dividend is usually distributed once a year. Before that, the exact amount must be voted on at the general meeting. American companies on the stock exchange usually pay a dividend to their investors once a quarter.

For investors who want to receive a dividend payment every few months, it makes sense to invest in ETFs whose companies pay dividends at as different times as possible during the year. With a little research and patience, you can put together a deposit that you should receive regular payments from.

For investors who are not looking for regular payouts anyway, it is an advantage if the dividend is paid out as early as possible in the year. This is often the case with German companies anyway. Then you benefit even more than you already have from the so-called compound interest effect (see above).


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