Why dividend ETFs may not be worthwhile
Who doesn't love getting passive income from dividends. But picking dividend stocks isn't passive and some investors want the reward without the work. Dividend ETFs can be a convenient way to do that.
I went to do some research to see if I could find any interesting dividend ETFs over the past week. To my dismay, their value propositions aren't good enough. Let me explain.
Dividend gains, unlike capital gains, are often taxable for investors. The US offers the most number of ETFs, over 2,000 of them, but it attracts a 30% dividend taxation for foreign investors. This would reduce the actual dividends received, and not to forget having to pay for the ETF fees too.
I deem a good dividend ETF as one that is broadly diversified and could distribute at least 5% dividend yield.
Global X SuperDividend ETF (SDIV) $Global X Funds Global X Superdiv Etf (SDIV.US)$ is offering a very attractive dividend yield of 10.18% that is paid out monthly! Even after a 30% dividend tax, the yield is still good at around 7%.
Upon further digging, I noticed that the ETF has only generated 0.93% per year for the last 10 years. This means that the ETF price has been falling and ate up the dividend gains over the years.
I can think of two reasons. One is that such high yield stocks tend to be trashy and hence the underlying stock performance are bad. Second is that the ETF might be partly distributing capital, on top of the dividends, to improve the yield, causing the value of the ETF and the price to go down.
After considering the 30% div tax, a foreign investor in SDIV will actually lose money even after holding the ETF for 10 years!
One way to reduce the div tax is to invest in Irish-domiciled ETFs but there aren't dividend-focused ETFs to choose from.
Or, pick ETFs that are listed in, and investing in, nil dividend tax countries. Singapore is one such place and there are a few dividend ETFs for investors to choose from. Unfortunately, their yields didn't make my minimum 5% cut.
Even the REIT ETF $LION-PHILLIP S-REIT (CLR.SG)$ is yielding 4+% now. Moreover, it is sector specific and not broad-based enough to be a standalone investment in the portfolio. It would have to be mixed with other investments to achieve some diversification. Otherwise any impact to the REIT sector would hurt the entire portfolio.
We can look at UK dividend ETFs too since there's no dividend tax there. For example, iShares UK Dividend UCITS ETF (IUKD) is yielding 5.34% but the expense ratio of 0.4% will bring below 5%. Marginal so still passable, but pounds have not been doing well so the actual gain will be lower after accounting for forex losses.
Lastly, we can look at Hong Kong. You would notice ex-British colonies are likelier to practise nil dividend taxation policies. Global X Hang Seng High Dividend Yield ETF (3110) $Global X Hang Seng High Dividend Yield ETF (03110.HK)$ is yielding 7.04% but we have to consider 10% dividend tax due to the underlying Chinese holdings and a 0.68% ETF fee. After the deductions, the resulting yield is 5.66%.
Although the yield still looks good, but 36.03% of the dividends were paid out of capital, which lowers the share price and not really a gain by itself. That means that only 3+% is real dividend gains.
There you go, I could hardly find a decent dividend ETF that would make sense after all the taxes, fees and capital distributions. Unfortunately the best way to receive dividend income is to build a portfolio yourself.
I went to do some research to see if I could find any interesting dividend ETFs over the past week. To my dismay, their value propositions aren't good enough. Let me explain.
Dividend gains, unlike capital gains, are often taxable for investors. The US offers the most number of ETFs, over 2,000 of them, but it attracts a 30% dividend taxation for foreign investors. This would reduce the actual dividends received, and not to forget having to pay for the ETF fees too.
I deem a good dividend ETF as one that is broadly diversified and could distribute at least 5% dividend yield.
Global X SuperDividend ETF (SDIV) $Global X Funds Global X Superdiv Etf (SDIV.US)$ is offering a very attractive dividend yield of 10.18% that is paid out monthly! Even after a 30% dividend tax, the yield is still good at around 7%.
Upon further digging, I noticed that the ETF has only generated 0.93% per year for the last 10 years. This means that the ETF price has been falling and ate up the dividend gains over the years.
I can think of two reasons. One is that such high yield stocks tend to be trashy and hence the underlying stock performance are bad. Second is that the ETF might be partly distributing capital, on top of the dividends, to improve the yield, causing the value of the ETF and the price to go down.
After considering the 30% div tax, a foreign investor in SDIV will actually lose money even after holding the ETF for 10 years!
One way to reduce the div tax is to invest in Irish-domiciled ETFs but there aren't dividend-focused ETFs to choose from.
Or, pick ETFs that are listed in, and investing in, nil dividend tax countries. Singapore is one such place and there are a few dividend ETFs for investors to choose from. Unfortunately, their yields didn't make my minimum 5% cut.
Even the REIT ETF $LION-PHILLIP S-REIT (CLR.SG)$ is yielding 4+% now. Moreover, it is sector specific and not broad-based enough to be a standalone investment in the portfolio. It would have to be mixed with other investments to achieve some diversification. Otherwise any impact to the REIT sector would hurt the entire portfolio.
We can look at UK dividend ETFs too since there's no dividend tax there. For example, iShares UK Dividend UCITS ETF (IUKD) is yielding 5.34% but the expense ratio of 0.4% will bring below 5%. Marginal so still passable, but pounds have not been doing well so the actual gain will be lower after accounting for forex losses.
Lastly, we can look at Hong Kong. You would notice ex-British colonies are likelier to practise nil dividend taxation policies. Global X Hang Seng High Dividend Yield ETF (3110) $Global X Hang Seng High Dividend Yield ETF (03110.HK)$ is yielding 7.04% but we have to consider 10% dividend tax due to the underlying Chinese holdings and a 0.68% ETF fee. After the deductions, the resulting yield is 5.66%.
Although the yield still looks good, but 36.03% of the dividends were paid out of capital, which lowers the share price and not really a gain by itself. That means that only 3+% is real dividend gains.
There you go, I could hardly find a decent dividend ETF that would make sense after all the taxes, fees and capital distributions. Unfortunately the best way to receive dividend income is to build a portfolio yourself.
Disclaimer: Community is offered by Moomoo Technologies Inc. and is for educational purposes only.
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ProfitTogether : Good Hope Keep It Coming
ProfitTogether : What would be a good sector to focus now?
48685 : thank you for sharing
Moomoobo : Hi When is ETF fee is payable? And the deduction/payment method? Don’t see this info in moomoo platform
Cold Coffee Moomoobo : https://www.futuhk.com/en/support/topic326?lang=en-us
Moomoobo : In other words ETF value is deteriorating from the management fee payment
cockNTail : transportation and utilizes are good sectors to be looking at.