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How do dividends work when being paid via an ETF?

A dividend is a share of the profit, paid to the shareholders. Whilst that is understandable when owning a stock of an individual business, how does it work when owning an ETF which itself holds multiple stocks?

Do all the individual businesses dividends get pooled together and then paid in a lump sum to the ETF holder?

  • There are numerous web sites that provide the ex-dividend dates for securities. Whether some pay monthly, quarterly or on some other frequency is unknown to me. – Bob Baerker Jan 15 at 1:14
  • @BobBaerker my question is not about the frequency of payments, but rather what are the payments. Does the ETF collect them from the individual stocks and then pass it on? – Darren rogers Jan 15 at 2:51
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    ETFs holding that hold stocks that pay dividends distribute those dividends to shareholders. ETFs holding bonds that pay interest will distribute that interest as well. Dividends and interest payments received via ETFs are taxed just like income from the underlying stocks or bonds. – Bob Baerker Jan 15 at 3:11
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There are two main solutions: pay out, and reinvest. In one case, the ETF investors get cash; in the other case the ETF gains in value as it holds more of the underlying assets. Each ETF will document what choice it made - typically this choice is fixed when the ETF is created. Also some details of the implementation may be documented. Payout frequency or reinvestment strategy are commonly stated as well.

  • In US (which OP is in per profile, but not stated in Q) the choice is practically always 'distribute', because 'retain' is taxed more, giving investors less return, and investors rarely prefer lower-return funds (for the same risk/strategy) – dave_thompson_085 Feb 15 at 17:10
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You assumed correctly that they are pooled together. Here's some more info just in case:

  • Just like a regular stock, an ETF will have an ex-dividend date, record date and payment date.
  • All dividends between distributions are pooled together and stored somewhere. This storage location can be found in your ETF's prospectus (e.g. a non-interest bearing savings account). When payout is due, the funds are withdrawn from this location.
  • The dividends are distributed on a specified frequency (e.g. yearly, every 6 months, every month, ...). This frequency can also be found in your ETF's specifications.
  • ETFs can be distributing (paying out dividends to the ETF shareholders), or accumulating (using the dividends themselves to buy more underlying stock). Depending on your country, some of these might not be available or one might be more tax advantageous than the other.

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