In the world of Exchange Traded Funds (better known as ETFs or exchange-traded funds), there is one type that has gained a lot of appeal in recent years: monthly dividend ETFs. As an investment product that combines the unique features of these vehicles, such as low costs and diversification, with the distribution of a steady stream of income, they are highly valued by investors, especially those looking for their investments to cover their recurring expenses.
What is an ETF with monthly dividends?
ETFs with monthly dividends are funds that invest in a diversified portfolio of assets, such as stocks, bonds, or other financial instruments, and distribute the income generated by those assets to investors in the form of monthly dividends.
These ETFs are typically composed of companies with a policy of regular dividend payments, as well as bonds and other income-generating assets.
How does an ETF with monthly dividends work?
The operation of ETFs with monthly dividends is simple. First, an index is selected that groups companies likely to pay dividends, meaning those that have a high probability of doing so, or bonds that pay interest periodically.
Then, these assets are collected, generating continuous income for the ETF. Finally, payments are made similar to any other fund, meaning they are distributed based on each investor’s participation.
In particular, bond ETFs can also distribute income regularly, which increases their appeal to investors seeking stability and a constant cash flow.
Types of ETFs with monthly dividends
Depending on how the incoming dividends are managed, we can distinguish two types of ETFs:
- Distribution ETFs: Funds that distribute dividend income directly to investors.
- Accumulation ETFs: Instead of paying dividends, these ETFs automatically reinvest them in the fund, allowing investors to benefit from the effects of compound interest over the long term.
Additionally, the ETFs that distribute dividends can be classified into:
- High-yield dividend ETFs
- Dividend growth ETFs
Advantages of ETFs with monthly dividends
- Regular income: The main advantage of ETFs with monthly dividends is that they generate constant income, which is especially useful for investors who need frequent cash flow to cover expenses like bills, supplement their monthly income, or indulge themselves.
- Diversification: Being ETFs, they offer high diversification since they invest in a wide range of assets, which helps reduce risk in an investment portfolio.
- Automatic reinvestment: Many platforms and managers allow the automatic reinvestment of generated dividends, enabling investors to take advantage of the benefits of compound interest.
- Lower volatility: ETFs with monthly dividends are typically composed of more stable and less volatile companies and assets, as many are recognized for their commitment to dividends or bonds from solvent issuers, offering greater security in times of volatility.
Disadvantages of ETFs with monthly dividends
- Reduced return: ETFs that pay monthly dividends tend to be composed of mature companies that prioritize dividend payments over growth or bonds with known yields. Therefore, they generally offer less potential for appreciation compared to other more aggressive and risky ETFs.
- Higher costs: Although ETFs are known for their low costs, some ETFs with monthly dividends may have slightly higher fees due to requiring more active management to maintain a constant income flow.
- Tax impact: Receiving dividends is subject to taxation, which reduces the net return for investors. However, if dividends are automatically reinvested, immediate taxation may not be necessary.
Is it a good option to invest in ETFs with monthly dividends?
If you’re wondering whether it’s a good idea to invest in ETFs with monthly dividends, the answer depends on your investor profile. Mostly, they are an excellent option for those seeking regular income and greater stability in their portfolio, especially for those with a more conservative profile. They offer the benefits of ETFs along with the highly sought-after generation of income. However, they may not be the best option for those seeking higher long-term returns.
Invest in Monthly Dividend ETFs with inbestMe
When looking for and investing in these products, it can be beneficial to do so through one of the investment platforms or robo-advisors available in the market, as this way the costs will be lower, and it is perfect for investing in ETFs if you are a beginner. For example, inbestMe offers a wide range of monthly dividend ETFs, along with other investment products that can complement your portfolio and grow your savings.
In the case of inbestMe, in addition to its low costs and wide range of products, it also provides tools that can help you manage your investments efficiently. In the realm of ETFs, the platform has three different branches: standard, SRI (socially and environmentally responsible), and Value, which cater to all investor profiles. Moreover, you can start investing with them from just 5,000 euros. What are you waiting for to get started?
