Dividend ETFs: Important Tools for Advisors, Income-Hungry Clients

In some circles, dividend investing is considered a factor or style and while enthusiasm for various factors and styles shifts, the utility of investing for dividends is a viable all-weather strategy.

In large part, that’s how Warren Buffett investors. Scan the Berkshire Hathaway portfolio of equity holdings and it’s clear that the vast majority of those stocks are dividend payers. That’s certainly true of Berkshire’s largest holdings, such as Apple (NASDAQ: AAPL), American Express (NYSE: AXP) and Coca-Cola (NYSE: KO). Moreover, those names, among other Buffett favorites, aren’t just dividend payers. They’re payout growers.

For advisors, there’s added usefulness when it comes to dividend strategies because it’s likely a concept many clients are already familiar with and one they readily embrace. Plus, there’s plenty of good news on this front.

In the fourth quarter global payouts jumped 8.4%, hitting a record $1.56 trillion. That growth rate was actually 13.9% when stripping out the effect of currency fluctuations and in the last three months of 2022, 88% of global dividend payers held steady or boosted payouts, according to the latest reading of the Janus Henderson Global Dividend Index.

ETFs Effective Avenues for Dividend Access

Exchange traded funds are efficient options for advisors looking to serve clients’ equity income needs. There hundreds of funds in this category addressing large-, mid- and small-cap stocks as well as domestic, developed and emerging markets equities.

“An ETF can pay dividends if it owns dividend-paying stocks.1 It may pay investors regularly—monthly, quarterly, or annually, for example—or dividends may be issued as a special case, such as when a company within the ETF performs well and has a larger amount of cash than usual,” according to Charles Schwab research. “However, dividends are not guaranteed. Companies facing financial troubles may be forced to cut or eliminate their dividend payments.”

Dividend ETFs, particularly when deployed in tax-advantage long-term accounts, such as Roth IRAs, are all the more potent because these vehicles are efficient, effective tools for dividend reinvestment.

“Reinvesting dividends might change the overall return of your portfolio as you accumulate capital over the long term,” adds Schwab. “The additional shares may yield more dividends, thus creating a compounding effect. But remember, companies may reduce or cut their dividends at any time, so it's important for investors to do their research to find companies with sound financial metrics to help mitigate this risk. Additionally, a stock paying a dividend can still decline in price, which would reduce the total return.”

Another Area Where Advisors Can Assist Clients

While many dividend ETFs have the vibe of “set it and forget it” investments, that doesn’t mean there aren’t avenues for advisors to further assist clients. There are, particularly on the tax front.

Important, not all dividends lobbed off by ETFs are the same. Some are qualified dividends and taxation of those payouts is an area where clients are likely to need assistance.

“The difference between qualified and nonqualified dividends typically is typically determined by the amount of time an ETF holds the underlying stock, and the amount of time a dividend ETF shareholder holds a share of the fund,” concludes Schwag. “Understanding the tax implications of ETFs and the ins and outs of dividends can be complex, learn more about ETFs and taxes and always consult with your tax professional for any questions about the taxation of ETFs.”

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