Many investors are attracted to exchange-traded funds (ETFs) because they offer diverse exposure to many assets without having too much money tied up with just one company. ETFs are efficient funds that can be bought and sold through brokerage accounts, so you can pick and choose what sector you want exposure to.
What are dividends?
Dividends are payments made to shareholders of a company. They are usually paid quarterly; however, some companies pay dividends monthly or yearly. The number of shares that a shareholder owns directly influences the number of dividends they receive. For this reason, dividends are sometimes called ‘dividend income.’
You should not be confused with interest earned from putting money into an account such as a savings account or CD (certificate of deposit). Interest rates vary over time, but the return on investment is fixed, whereas dividend payments can vary depending on how well – or poorly – a company performs during any period.
Many significant companies pay dividends; these include General Electric Company (GE), McDonald’s Corporation (MCD) and MicrosoftCorporation (MSFT). Investors can choose from thousands of companies globally that pay dividends to their shareholders.
Investors prefer stocks that pay high dividends; they often buy these shares in the hope of receiving regular income over some time. Different companies have different dividend policies. For example, some may decide not to distribute any funds or only part of their profits as dividends. Others, however, pass on most or sometimes even all of their profits.
What are ETFs?
Exchange-traded funds ( ETFs ) are baskets of securities, which you can trade on stock exchanges. ETFs gained in popularity during the ’90s with the introduction of index funds, when they became popular investment products. One difference between ETFs and index funds is dividends paid by the components in an ETF.
During 2013, a low-interest-rate environment had started to diminish dividend yields on stocks because of weak economic growth. This made it more difficult for investors looking for yield opportunities to find low-risk investments. As a result, investors placed their money into bond ETFs, resulting in increased demand for fixed-income securities.
Since fixed income securities are known for their steady and reliable returns, ETFs seem like an excellent choice to hold when you consider that they do not need to be bought or sold at the end of each trading day. The only fees that are associated with ETFs are brokerage commissions on buying and sales in most cases. So, you can state that Exchange Traded Funds ( ETFs ) pay dividends less often than Index funds and might have lower dividend yields than stocks.
Trading ETFs in Singapore
ETFs may hold a basket of equities within one market or across different markets. Because many countries have their indexes, you might end up owning shares from multiple countries when holding an ETF containing companies from those different markets. For example, if you were to buy shares from SPDR STI ETF, Singapore’s STI Index would be the only component included in this fund, and hence no international trading takes place here.
The closest comparison for Singapore-listed market ETFs is SGX US Liquidity Plus or USLM. This ETF is a fund that tracks the SGX US Liquidity Index, which aims to mirror the liquidity and return performance of US securities listed on the NYSE, NASDAQ and AMEX exchanges in Singapore dollars.
Although you could expect a similar return benefit from trading an ETF as compared to trading its constituents directly, it’s important to note that many factors affect stock prices, including events such as elections outcome, natural disasters, among others. Some countries also have different regulatory requirements for companies, so they may not react immediately to specific changes, just like companies listed in SGX do not match those in NYSE.
Investing in ETFs have both advantages and disadvantages. It allows you to invest more conveniently as you can also have access to different markets through one unit; for more on reputable online brokers, visit https://www.home.saxo/en-sg/products/etf.