Dividend exchange-traded funds (ETFs) are primarily funds invested in stocks that have a high dividend payout history. Such stocks may either be domestic or international companies across various industries and sectors. Generally, high dividend payout histories are a feature of large blue-chip companies with lower risks.

Working of an ETF

ETFs are a basket of multiple stocks and are similar to mutual funds. However, the former types of funds are traded like individual stocks. ETFs also allow investors to gain wider exposure and are less risky as the holding companies are large and stable. When an individual invests in the shares of ABC Ltd., there is a risk if the price decreases.

Investors who are contemplating investing in high dividend ETF funds need to consider the following four factors:

Objective of the fund

Not every dividend ETF invests in the same manner. Some of these funds may invest only in companies that have a history of increasing dividend payouts for a particular period. Alternatively, some other funds may invest in stocks of companies that pay the highest dividends. Generally, investors are able to understand the objective of the fund from its name.

Historical performance of the fund

Before making an investment decision, it is advisable that investors research the fund’s track record in terms of its performance and earnings history. Additionally, they must evaluate the kind of returns the fund has given over the years. This data is easily available on the fund’s website or investors may research the same online via a fund tracker portal. Compare several dividend ETFs and check their year-to-date, three-year, and five-year average returns to make an informed decision.

Determine the annualized yield

The historical annual payout for every dividend ETF is easily available on the issuer’s website or in the prospectus. Alternatively, investors may also calculate the annualized yield by dividing the latest dividend payout by the net asset value (NAV) of the fund or its share price. Further, to determine if the yield is aligned with the industry average or exceeds the same, investors may compare the yield with the S&P 500, which is a commonly used benchmark for calculating the average dividend payout.

Price of the high dividend ETFs

To calculate the price of the high dividend ETF, investors must check the expense ratio either online or in the fund’s prospectus. The expense ratio is the percentage of the specific fund’s average net assets and is inclusive of all related operational costs. The expense ratio is calculated on an annual basis. As a rule of thumb, actively managed funds have a higher expense ratio while passively managed funds have a lower expense ratio.

High dividend ETF funds are preferred investments for individuals who have a lower risk profile and seek regular income flow. Alternatively, investors desirous of balancing their risky portfolios may choose to invest in dividend ETFs.