What are ETF dividends?
Dividends are a portion of profits that a company shares with its shareholders, typically paid quarterly. Canadian stock markets include many companies that pay a high dividend. The dividend yield is the annual dividend per share divided by the price per share.
Selecting and managing your own dividend stocks can be time-consuming, however. Here’s where Canadian dividend exchange-traded funds (ETFs) enter the scene. They offer investors a diversified stock portfolio, which could include dividend-paying companies, that’s easy to manage. For example, the Fidelity Canadian High Dividend ETF (FCCD) holds 65 dividend-paying stocks, as at Jan. 15, 2024.
There are several varieties of dividend ETFs, including ETFs comprising U.S. or international stocks—for example, Fidelity’s U.S. High Dividend ETF or International High Dividend ETF.
How do dividends work in Canada?
Not all companies pay dividends—it isn’t mandatory to do so. However, paying a healthy dividend can make a company’s stock attractive to income-seeking investors. A company’s board of directors decides the amount to be paid to shareholders based on factors such as profitability, cash flow and the company’s future investment plans. Many companies aim to pay a consistent dividend, which often grows over time.
To be eligible to receive the dividend, an investor must own shares on what’s referred to as the “ex-dividend date”—the first date that the stock trades without the right to receive the dividend. The actual list of those who will receive dividends is prepared on the “record date,” which is typically the business day after the ex-dividend date.
Dividends are paid on a per-share basis, so the amount of money shareholders receive depends on the number of shares they own. For example, if a company announces a dividend of 10 cents per share, and you own 100 shares, then you would receive $10 of dividends.
In the case of ETFs, since the fund owns the underlying shares, it receives all the dividends it is eligible for. After receiving the dividends and subtracting expenses, the ETF could either distribute the net dividends to unit holders or reinvest them. To help maximize the effect of compounding, you could choose the dividend reinvestment plan (DRIP), where the dividend distributions you receive from a fund are used to purchase additional units of the same fund at the current market price. For example, FCCD distributes dividends monthly, and investors can opt into a DRIP to automatically purchase more units.
When do dividend hikes, cuts and pauses happen?
Consistent and increasing dividends are often viewed as a sign of a company’s financial health. Investors often read into changes—or lack thereof—in a company’s dividend policy.
