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If I hold 100 shares of SPY ETF, and one of the participating companies (A) pays out a dividend of 1$ per share. Will I get any dividend? If yes, I guess I will not get 1$ per share of SPY.

It seems I will get x $/share of SPY, where x is the fraction of A in the SPY holdings.

Is this right?

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The expenses of an ETF are taken from the dividends is another point to note here. –  JB King Jan 22 at 18:57
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3 Answers 3

up vote 5 down vote accepted

Join me for a look at the Quote for SPY.

A yield of 1.82%. So over a year's time, your $100K investment will give you $1820 in dividends.

The Top 10 holdings show that Apple is now 3% of the S&P. With a current dividend of 2.3%.

Every stock in the S&P has its own different dividend. (Although the zeros are all the same. Not every stock has a dividend.) The aggregate gets you to the 1.82% current dividend. Dividends are accumulated and paid out quarterly, regardless of which months the individual stocks pay.

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The amount, reliability and frequency of dividends paid by an ETF other than a stock, such as an index or mutual fund, is a function of the agreement under which the ETF was established by the managing or issuing company (or companies), and the "basket" of investments that a share in the fund represents.

Let's say you invest in a DJIA-based index fund, for instance Dow Diamonds (DIA), which is traded on several exchanges including NASDAQ and AMEX. One share of this fund is currently worth $163.45 (Jan 22 2014 14:11 CDT) while the DJIA itself is $16,381.38 as of the same time, so one share of the ETF represents approximately 1% of the index it tracks. The ETF tracks the index by buying and selling shares of the blue chips proportional to total invested value of the fund, to maintain the same weighted percentages of the same stocks that make up the index. McDonald's, for instance, has an applied weight that makes the share price of MCD stock roughly 5% of the total DJIA value, and therefore roughly 5% of the price of 100 shares of DIA.

Now, let's say MCD issued a dividend to shareholders of, say, $.20 per share. By buying 100 shares of DIA, you own, through the fund, approximately five MCD shares, and would theoretically be entitled to $1 in dividends. However, keep in mind that you do not own these shares directly, as you would if you spent $16k buying the correct percentage of all the shares directly off the exchange. You instead own shares in the DIA fund, basically giving you an interest in some investment bank that maintains a pool of blue-chips to back the fund shares. Whether the fund pays dividends or not depends on the rules under which that fund was set up. The investment bank may keep all the dividends itself, to cover the expenses inherent in managing the fund (paying fund management personnel and floor traders, covering losses versus the listed price based on bid-ask parity, etc), or it may pay some percentage of total dividends received from stock holdings. However, it will virtually never transparently cut you a check in the amount of your proportional holding of an indexed investment as if you held those stocks directly. In the case of the DIA, the fund pays dividends monthly, at a yield of 2.08%, virtually identical to the actual weighted DJIA yield (2.09%) but lower than the per-share mean yield of the "DJI 30" (2.78%).

Differences between index yields and ETF yields can be reflected in the share price of the ETF versus the actual index; 100 shares of DIA would cost $16,345 versus the actual index price of 16,381.38, a delta of $(36.38) or -0.2% from the actual index price. That difference can be attributed to many things, but fundamentally it's because owning the DIA is not the exact same thing as owning the correct proportion of shares making up the DJIA. However, because of what index funds represent, this difference is very small because investors expect to get the price for the ETF that is inherent in the real-time index.

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DIA yield is 2.08%, see finance.yahoo.com/q/hp?s=DIA+Historical+Prices for recent dividends. You might wish to edit the end of your 3rd paragraph to correct this - "the DIA, the fund does not pay dividends." Otherwise, nice explanation. –  JoeTaxpayer Jan 22 at 20:48
    
Edited; I couldn't find dividend summary info in the usual places I look, and so assumed, and you know what that does. –  KeithS Jan 22 at 21:02
    
It was a nice answer, now it's excellent. Great writeup on ETF dividend process. –  JoeTaxpayer Jan 22 at 21:38
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Dividends are not paid immediately upon reception from the companies owned by an ETF.

In the case of SPY, they have been paid inconsistently but now presumably quarterly.

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