Dividend exchange trade funds (ETFs) can be an investment vehicle for investors whose investment strategies place a priority on regular income and cash flow over capital growth and appreciation. Rather than choosing the investment vehicle first and building a strategy around that vehicle, an investor should first devise a strategy that reflects his or her risk tolerance and objectives for generational wealth creation. A properly-formed investment strategy will select a blend of products, potentially including dividend ETFs, that serves the investor’s goals and objectives.
Dividend exchange trade funds (ETFs) can be an investment vehicle for investors whose investment strategies place a priority on regular income and cash flow over capital growth and appreciation. Rather than choosing the investment vehicle first and building a strategy around that vehicle, an investor should first devise a strategy that reflects his or her risk tolerance and objectives for generational wealth creation. A properly-formed investment strategy will select a blend of products, potentially including dividend ETFs, that serves the investor’s goals and objectives.
The mission of the investment advisors on the 6th Avenue Team is to work with clients to develop the investment strategies that serve their unique needs. If a strategy calls for dividend investing, we then help the client to understand the advantages and drawbacks of dividend ETFs and to determine whether they are the right solution for their portfolios
How Do Dividend ETFs Work?
Dividend ETFs hold a large number of equity securities that pay regular dividends. Those securities may be shares of common or preferred stock, interests in real estate investment trusts, or other assets that generate regular income. In most cases, the components of a dividend ETF will track a dividend-specific market index.
Most dividend ETFs are passively managed, but the entity that forms a dividend ETF might periodically analyze its holdings to verify that the companies comprising the dividend ETF are continuing to pay dividends at yield levels that meet or exceed certain targets.
Holders of dividend ETFs can use distributions to buy more ETF shares, in which case they may be charged a brokerage commission, or they can direct those dividends to be paid directly to them. This accounts for the general perception that dividend ETFs are a lower-risk investment product.
Other important features of dividend ETS include:
· Taxation of distributions. Distributions are taxable, but the tax rate that applies to those distributions will be a function of whether dividends are qualified or unqualified, which itself depends upon the amount of time that the dividend-yielding asset has been held by the dividend ETF.
· Share trading. Like other types of ETFs, dividend ETFs can be bought and sold on an intraday basis while markets are open for trading. This allows investors to buy shares on margin or to short sell dividend ETF shares.
· No minimums. Investors can purchase just a single share of a dividend ETF with no minimum investment or holding periods.
· Transparency. Investors will have access to real-time information about a dividend ETF’s holdings. This gives investors a better opportunity to diversify their portfolios with products that span different markets, industry sectors, and asset classes.
Dividend ETFs vs Other ETFs
Investors can choose from over two thousand different domestic and international ETFs, all of which reflect advantages such as diversity, transparency, and liquidity. Dividend ETFs focus on income over capital appreciation. This may reduce the tax efficiency of the investment to the extent that distributions will be taxed at a qualified or unqualified distribution rate.
An investor’s overall investment strategy will provide the appropriate structure for comparing different types of ETFs:
· Different types of dividend ETFs may have different yields and offer higher or lower cash returns. Understanding the type and mix of securities in a dividend ETF will enable an investor to compare yields more objectively.
· Investors whose strategies call for long-term capital appreciation may be more interested in ETFs that focus on growth over income.
· Investors with a higher tolerance for risk may consider IPO ETFs that hold shares of startup companies and other entities that may experience significant growth.
· Currency or commodity ETFs provide opportunities for investors to take advantage of short-term market conditions with substantial one-time returns.
An ETF investment can give the investor liquidity. An investor can make very short-term ETF investments with no minimum volume or holding period requirements. The best approach to making an investment decision will be to verify that all portfolio assets, including dividend ETFs, are consistent with the wealth management objectives that define the portfolio itself.
The philosophy of the 6th Avenue Team at Ingalls & Snyder, LLC is that no single investment plan will be the optimal one for every one of the individuals, institutions, and not-for-profit entities that we advise. Our philosophy drives us to develop an in-depth understanding of each of our client’s unique goals and circumstances before we begin to formulate our investment recommendations. When we are sufficiently confident that we have gained that understanding, we present our clients with a slate of investment recommendations that are generally divided between core and strategic holdings. High dividend ETFs will be a recommended component in one or both of those holdings only if they deliver the performance that is called for by the investor’s circumstances.
For more information about dividend ETFs, call our midtown Manhattan offices to schedule an in-person appointment with one of our financial professionals.
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The 6th Avenue Team Investment Philosophy is built upon a holistic, tax efficient approach to achieving your long-term financial goals.
The 6th Avenue Team Investment Philosophy is built upon a holistic, tax efficient approach to achieving your long-term financial goals.
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