Dividends are a common component of most investment portfolios. Dividend-paying equity instruments often comprise a significant proportion of individuals’ and institutions’ investment portfolios, especially those looking to supplement their retirement or pension income.
Investing in dividend-paying stocks can also help investors meet their capital gains objectives.
Dividends vs Capital Gains?
Firstly, let’s look at the difference between capital gains and dividends:
Capital Gains
Capital Gains are the profits received from buying and selling an asset at a higher price than is paid for it. It is important to note that only realized (i.e., sold) capital gains result in taxable profit; unrealized capital losses do not offset realized profits either.
The objective of most investors is to earn capital gains, and Singapore’s tax regime certainly encourages this approach. Capital Gains are generally only subject to tax when funds are withdrawn from the investment account – not when they are initially contributed or appreciated within the account.
Dividends
Dividends represent a return of funds by a publicly-listed entity (typically an incorporated company) back to its shareholders in the form of cash payments. Dividends that come from realized capital gains may be considered companies’ distributable reserves that come about due to profitable investing activities.
Dividends that come from realized capital losses may be considered as returns of excess funds by such entities. Because such dividends comprise a return of shareholder funds, they would usually be taxed like interest income under the Income Tax Act.
Dividends can be a great way to supplement your retirement or pension income, especially in the absence of a CPF Retirement Account that pays a monthly annuity.
Do ETFs pay dividends in Singapore?
Investors commonly question whether ETFs distribute dividends and how often they do so. The short answer is no – most passive index-tracking ETFs typically don’t pay dividends. Investors looking for high yield should consider investing in securities based mutual funds or unit trusts that hold stocks with high dividend yields.
What are the reasons why ETFs typically don’t pay out dividends?
It is argued that because the structure of an index determines the ‘dividend yield’ on a stock, i.e., indices typically have many stocks with higher yields vs other indices that have lower yields, ETFs tracking these indices will have a higher yield vs an index that has lower yields.
Therefore, since dividends are not expected to be a component of returns over the long term for an ETF, it doesn’t make sense to issue dividends. High dividend stocks tend to lag in market rallies and underperform in downtrends, while high growth stocks outperform their peers in bullish and bearish environments.
Another reason is that some people view the payment of dividends as a way for asset managers or investment firms to extract value from their portfolios at the expense of shareholders. I.e., they believe money paid out as dividends could have been reinvested back into portfolio positions with potentially higher returns than cash dividends.
Most ETFs investing in international indices don’t pay dividends. ETFs that invest in fixed income securities like bonds would typically not distribute dividends either since these are buy-and-hold investments with no intention of capital appreciation.
How about Singapore Exchange Traded Funds?
There are a few exceptions where ETFs could potentially issue dividends. For example, SPDR Straits Times Index ETF, which invests in the Straits Times Index (ETF also tracks SGX FTSE ST China A50), pays quarterly dividends based on the performance of the Index constituents – well, at least according to their website. For recent dividend distribution history, see here.
Conclusion
ETFs are not the best choice if you’re looking for a dividend yield from your investment. Although they can be an excellent one-stop diversified solution for novice investors, those with experience who understand how to read stock charts and know technical analysis may want to consider investing in individual stocks instead.
As always, seek professional financial advice before making any significant investments as returns are not guaranteed, and past performance is no indication of future performance or success.