How do dividend yield ETFs work?

As the name suggests, dividend yield ETFs are those that invest in stocks that pay dividends.

This is a fundamental difference with accumulation ETFs. Where dividends accrue to the ETF’s assets rather than being distributed to unitholders.

Dividend yield ETFs have gained significant popularity in recent years. Especially in a context where low interest rates do not yield investors high returns.

What is dividend yield?

Dividend yield is a financial concept that refers to the percentage yield offered by a given share or instrument relative to its price.

From a mathematical point of view, the formula is as follows:

Dividend yield (%) = (dividend / share price) x 100

For example, imagine that a share offers a dividend of €0.60 per month and its price is €10. In this case, the dividend yield of this share will be 6%.

It is also often referred to as dividend yield at the index level, which is determined by taking into account the average dividend yield of its constituent stocks as a whole.

Thus, for example, the average dividend yield of the S&P 500 has been 3%, while in the IBEX 35, the average dividend yield of the Spanish index has been 3.5%, with values above 5% (last 15 years).

The dividend yield not only gives an idea of the approximate yield of a given security. It also allows comparisons with other assets or instruments such as deposits or government bonds.

Dividend yield ETFs: asset selection

Dividend yield ETFs select their assets based on a company’s dividend payout history.

A clear example is the dividend aristocrats or dividend kings in the United States, i.e. a group of companies that have continuously increased their dividends over the last 25 or 50 years, respectively.

These companies are a guarantee that they will continue to pay high dividend yields in the future.

There are specific indices comprising some of these companies, which are embodied in an ETF.

A case in point is the SPDR S&P US Dividend Aristocrats UCITS ETF Dis or the ProShares S&P 500 Dividend Aristocrats ETF. Its portfolio is composed of companies with a track record of growing dividends over the past 25 years.

In fact, as with mutual funds or other ETFs, we can also find different dividend yielding equity ETF strategies.

Those that only take into account the market capitalisation of the shares, specific ones that invest in a region or country, emerging markets…

Dividend distribution schedule

As for the timing of dividend distributions, each company will probably have a different dividend distribution schedule, but the ETF will distribute profits at the same time.

How are dividend yield ETFs taxed?

Dividend income from the ETF must be taxed and paid, as with any other interest-bearing product.

As it is a profit obtained from the investment, it is considered as capital income and is therefore taxed on the savings taxable base of personal income tax, with the following tax brackets:

  • Up to €6,000 taxed at 19%.
  • Up to €50,000 (the next €44,000) is taxed at 21%.
  • From €50,000 onwards they are taxed at 23%.

To this income must be added those obtained from dividends from investment funds and/or the generation of capital gains on the sale of your shares in any of these financial products.

And they may be offset against the capital losses of these investment vehicles.

Invest in ETFs through inbestMe

With inbestMe ETFs, you’ll be investing in a hand-picked selection of exchange-traded funds that track the performance of the world’s best indices.

These ETFs have been chosen 100% strategically to achieve their best performance over the medium to long term. Whether your strategy is to receive dividends or to accumulate dividends in the fund’s assets.

We will do the monitoring for you and, if necessary, we will make changes to the composition in order to always follow the best strategy.

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