SteadyOptions is an options trading forum where you can find solutions from top options traders. TRY IT FREE!

We’ve all been there… researching options strategies and unable to find the answers we’re looking for. SteadyOptions has your solution.

Why Dividend ETFs Yield Less Than Expected


I was asked a great question the other day by a member.  He had done some math and noted that the reported dividends received by dividend ETFs (such as SDY, VIG, and others), was LOWER than it should be, than if you just took a weighted average of the EFF's holdings.

 

For instance, if an ETF consisted of equal portions of the following stocks:

 

Stock ABC, dividend of 2%

Stock DEF, dividend of 2.5%

Stock GHI, dividend of 2.25%

 

Then you would expect the ETF holding those stocks to yield 2.25%.  However, it would not.  You much more likely would see a yield somewhere around 1.9%.  He wanted to know why that was.  So I did some digging and this is what I came up with:

 

1.  The biggest difference is the fee the ETFs charge, while it is small (under 0.5%), the fee one charges makes a difference.  They take that fee out of dividends to minimize tax implications to the ETF holders.  For example, if SDY was supposed to yield 2.5%, but the expense ratio was .0.35%, the new yield is only 2.15%.  By taking it out of the dividends received, it reduces taxable expenses, as opposed to liquidating positions.

 

2.  The next is similar, as in it also relates to expenses, but about 0.1% (in one 0.15% in the other) reflects the transaction costs.  Trading shares isn't free for an ETF either.  They are constantly buying and selling shares to match the inflows and outflows of funds into the ETF.  They don't eat these fees, they're passed on.  In actuality this is about average as the transaction cost to most retail traders is higher or the same.  For instance, if I bough 10 shares of Walmart (approximate $75, or a cost of 7500) the trade would cost (on average) about $9.00.  Obviously if you can buy huge blocks of shares this goes down.  These ETFs buy and sell LOTS of shares every day.

 

3.  Then there is some bleed due to the fact that they are typically not 100% invested.  In ETFs like SDY and VIG there are a LOT of cash inflows and outflows every day.  Even if only 1% of the fund trades every day, they will have to be over 1% in cash.  So if the ETF is only 98% invested on average, you receive 2% less dividends than if you were 100% invested.  This lowers the yield too. As an example, if you were 100% invested and were going to receive a 2.5% dividend, by only being 98% invested, your dividend yield would drop to 2.45%.

 

Add all of that up, and you get a yield that "seems" anywhere from 0.3% - 0.5% to low.  That said, MOST small and mid size retailer investors will lose that much on transaction and holding costs too, if not more.

 

Let's say I carry a theoretical $100,000.00 portfolio, and want to be very diverse and buy 50 different dividend stocks, bearing an average of 2.5% dividend (good luck).  That means I allocate $2,000.00 to each stock.  With the average dividend large cap stock price being around $40, that means I'm buying 50 shares, which on TDAmeritrade's retail platform would cost $7.99 a pop.  So I lose 0.4% (.3995), acquiring the position.  Assume I re-balance annually to make sure my position sizes stay proper, and I only have to make adjustments on 1/2 of my positions (more likely more, but lets say 1/2), then you lose another 0.2%.  So my "effective" dividend is 1.9% -- or now worse than the ETF.

 

Obviously if you trade in large sizes, and hold longer without re-balancing, you can eventually beat the ETF dividend "bleed."  But for most people that just isn't the case if you want the diversity, the balance, and the dividends. 

 

What Is SteadyOptions?

Full Trading Plan

Complete Portfolio Approach

Diversified Options Strategies

Exclusive Community Forum

Steady And Consistent Gains

High Quality Education

Risk Management, Portfolio Size

Performance based on real fills

Try It Free

Non-directional Options Strategies

10-15 trade Ideas Per Month

Targets 5-7% Monthly Net Return

Visit our Education Center

Recent Articles

Articles

  • Things To Think About Before Getting Involved In Investing

    There are various benefits associated with investing. It can be a great way to boost your income, providing you with financial security during a troubling time. Smart investing also comes with the possibility of long-term returns, meaning it can be better to invest your money than leave it in your regular bank account (even if you are earning interest). 

    By Kim,

    • 0 comments
    • 189 views
  • Micron Technology (MU) Earnings Report June 30, 2022

    Welcome to the ORATS earnings report where we scan for companies with upcoming earnings announcements, check out historical earnings information, and find a potential options trade. Read on or watch the video overview here: https://youtu.be/IDgR3FzONnI.

    By ORATS_Matt,

    • 0 comments
    • 224 views
  • Does “Managing Winners” Add Value to Short Strangles?

    Some option educators suggest short strangles have historically benefited from actively managed exit strategies. A widely popularized approach is to enter S&P 500 strangles at 45 DTE and exit at 50% of the credit received or a 21 DTE time stop, whichever occurs first.

    By Jesse,

    • 2 comments
    • 4,702 views
  • NKE Earnings Report June 27, 2022

    Welcome to the ORATS earnings report where we scan for companies with upcoming earnings announcements, check out historical earnings information, and find a potential options trade. Read on or watch the video overview here: https://youtu.be/2mtx2ja-VwQ.

    By ORATS_Matt,

    • 0 comments
    • 233 views
  • KBH Earnings Report June 22, 2022

    Welcome to the ORATS earnings report where we scan for companies with upcoming earnings announcements, check out historical earnings information, and find a potential options trade.

    Read on or watch here:

    By ORATS_Matt,

    • 0 comments
    • 298 views
  • Know How To Trade Before Making An Investment

    Everyone is searching for a way to improve their living quality. Plenty of scopes are coming to the forefront and people are grabbing the opportunities with the hope of receiving the best revenue against their investment. A share market is a place that can return the high revenue of your investment.

    By Kim,

    • 0 comments
    • 319 views
  • Implied Volatility and Standard Deviation

    1. Isn't holding a naked long call (as a result of locking in a profit or plain buying outright call) in general a bad idea? Reason I think so is because of the nature of IV: it mostly falls when the underlying is rising. So you have short theta and a big long vega moving against you.

    By Mark Wolfinger,

    • 0 comments
    • 299 views
  • Introducing a "Risk Free" Trade

    A few weeks ago, I got the following email from one of our former members: "I would like to share with you an article about "projected no risk trades" or "no risk trades". Of course I was skeptical. But when he shared the setup with me, I became intrigued. How does the following risk profile look to you?

    By Kim,

    • 6 comments
    • 1,392 views
  • What You Trade Matters

    Traders love to tell people that they can trade anything. That if you have the skills to be a trader, the specific item traded is unimportant. That may be true for some professional traders who are skilled technicians. However, it’s very different for gullible amateurs.

    By Mark Wolfinger,

    • 0 comments
    • 633 views
  • The Big Loss

    At his blog, Joey offers his perspective on the top reason that so many trader wannabes are not, and will not, become profitable traders. His post is titled: Learn to Lose Money to Make Money. Here are the Excerpts from the blog.

    By Mark Wolfinger,

    • 0 comments
    • 822 views

  Report Article

We want to hear from you!


Guest The Lazy Trader

Posted

Excellent research. I always wondered the same thing.

Thx,

LT

Share this comment


Link to comment
Share on other sites


Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account. It's easy and free!


Register a new account

Sign in

Already have an account? Sign in here.


Sign In Now

Options Trading Blogs Expertido