One of the reasons investors love ETFs is because they’re like the Swiss Army knives of the investing world — they’re a simple way to get a little bit of everything with one move. 

When it comes to ETF’s, you can buy ASX200 ETF’s, Nasdaq100 ETF’s, Big Tech ETF’s and many more.

But one of the favourite ETF categories for investors is high-dividend ETFs.

 High dividend ETFs are funds that focus on companies that pay regular dividends - so it not only offers you potential capital growth, but also a steady, passive income stream.

Wait, how does passive income work?

Passive income is money you can earn without lifting a finger - it’s earned through your assets as opposed to through earning a salary or running a business.

An ETF that holds shares in dividend-paying companies will receive a share of those companies’ dividends when they’re paid out to investors.

The ETF then passes this income onto its investors.

As an investor, you can cash in on those dividends or reinvest them via a distribution reinvestment plan.

As an investor, you might use your passive income to supplement your salary income, or to fund an upcoming holiday.

What to look for in dividend ETFs:

So if the idea of letting your money work for you via ETFS to generate some side income sounds tempting, there’s a bit about dividend ETFs you should look out for:

Dividend yield:

Dividend yield is a percentage, which reflects the portion of the ETF’s price that’s paid out as a dividend annually. Higher dividend yield = mo’ moula for you.

For example, if an ETF is priced at $20 per share, and it pays out a dividend of $2 annually, its dividend yield would be 10%. 

Dividend payout frequency:

While most ETFs pay out their dividends quarterly, it’s not always the case.

Some pay monthly, some annually.

This is worth taking into account when thinking about your passive income needs.

Dividend growth:

Dividend payouts can increase over time, as the earnings of the companies that make up the ETF increase. 

It’s important to look out for ETFs with a history of increasing dividend payouts, as it likely means that the underlying companies have been increasing their profits and therefore distributing more of them.

Fees:

Understanding the ETFs management fees and associated costs is super important before making your investing decision.

An ETF with higher returns might also have much higher fees that leave you worse off on the whole.

To get you started on researching dividend ETFs, here are some of the strongest performing Australian Dividend ETFs.

Ranking the best performing ETFS isn’t an exact science as there are a lot of different factors to consider. 

This is just one ranking list, but other research bodies might have a different list of top-performing ETFs depending on how they’ve weighted certain factors. 

For example, this Forbes list has focused on ETFs that have a strategy to maximise dividends, but there are other sector-based ETFs that also have strong dividend yields.

There are a range of other factors you can use when it comes to researching dividend ETFs like funds under management, net asset value per unit, expense ratio etc.

If you’re keen to learn more about the ins and outs of ETFs, let us know in the comments what ETF questions you’d like us to answer!