Where do ETF dividends go?

Bryce: [00:00:31] Welcome to another episode of Get Started Investing feed, a podcast where we attempt to answer the most common money and investing questions from our community in an attempt for us to become better investors. If you are joining us for the first time, welcome. We strongly recommend that you scroll up and start at episode one. Now, while we are licensed, we are not aware of your personal circumstances. All information on this show is for education and entertainment purposes. Any advice is general advice only. So my name is Bryce and as always, I'm joined by my equity buddy, Ren. 

Alec: [00:01:02] How are you? I'm very good, Bryce. Excited for this episode. We are answering common questions on Get Started Investing the question today. Where do all the ETF dividends go? 

Bryce: [00:01:14] Great question. Great question. We're going to answer it. 

Alec: [00:01:18] Yes. Yes. 

Bryce: [00:01:20] Not all ETFs pay dividends, but for those that do, it can be a bit confusing where you're actually getting them, how often they're paid. Do they pay them at all? We're going to answer all of those questions in today's episode. Some of my ETFs pay dividends. Some don't. Do yours, Ren. 

Alec: [00:01:38] Yeah. 

Bryce: [00:01:39] They all pay. 

Alec: [00:01:39] Yeah, I'll make them pay. No, it depends. Depends on the underlying asset. But we'll get to that. And by the end of this episode, you'll also understand what ASX ETF DRP. The sea of acronyms that is in this world. You'll understand what that means. 

Bryce: [00:01:58] That's it. All right, Well, let's get stuck in first to. 

Alec: [00:02:01] Hold on, hold on. Because we get stuck in. I want to quickly check in $100 challenge. We're three weeks into our first month. 

Bryce: [00:02:08] And for those that have just joined, what is the challenge? 

Alec: [00:02:10] Every month we are trying to find a way to either make or save an extra $100 because $100 invested every month at the market's average return over 40 years is $350,000 epic. So we're turning $100 into 350,000 with the hundred dollar challenge the first month you're trying to sell your old drum kit. I'm doing online survey. How are you going? 

Bryce: [00:02:39] Look, it's. There's a bit of a process. 

Alec: [00:02:43] I know the whole narrative, so but actually just how you let's.

Bryce: [00:02:45] Just say to date, I haven't made my way 100. But it's panning out as exactly as I thought it would. 

Alec: [00:02:54] Yeah. 

Bryce: [00:02:55] Yeah. So if you're in the market for a drum kit, hit me up. 

Alec: [00:02:58] We'll save it for next week. But I've heard that you've bought a tux. Yeah. Yeah,. 

Bryce: [00:03:02] It's Been quite a journey. How you going? 

Alec: [00:03:06] Let's just say the hourly rate on doing surveys isn't great, but I am in double digits. 

Bryce: [00:03:14] Okay? You're in double digits in the sense of dollars. 

Alec: [00:03:18] Dollars. Okay, So. 

Bryce: [00:03:19] Okay, so you're ahead. Well, we did have Jason right through during the week saying that he loves the challenge. He's taken up your approach Ren and has done 20 surveys on Attapoll which is the platform that you're using. And he's made a whopping 3.45. 

Alec: [00:03:37] Stick with it, Jason, You'll get that. 

Bryce: [00:03:40] He said he's looking at selling all the footy and cricket cards. It's a good idea actually, but any tips on selling old books? So we'll pick that up next week. But if you have an idea for the $100 challenge for us, send it in contact@equitymates.com or hit us up on our social channels. You can also leave a voice message on our website. If you go to the contacts page, you can actually record an idea for us and we'll play it on the show.

Alec: [00:04:06] Yeah, so that episode is coming up next week. But Bryce, let's get to the episode today. ETF Dividends. Where do they go? Who's keeping them from us? 

Bryce: [00:04:13] The first question we've got to answer, though, Ren, is do ETFs actually pay dividends? 

Alec: [00:04:18] Yeah. So it depends on the underlying assets here. If the underlying assets pay, they will find they will find a way to your portfolio. With ETFs these days, it's not just shares that you can invest in, but you know, you can invest in a property ETF or a bond ETF. And so if a bond pays yield, if a property pays rent, or if a stock pays a dividend, whatever that income is, that money will find a way to you because you are the owner, you're the owner of the underlying assets through the ETF, you will eventually get paid the same amount of dividend as if you owned the underlying assets directly. So what do we mean by that? Let's say you own an ASX 200 ETF rather than having to buy the 200 biggest companies in Australia in 200 separate transactions. You buy it in one transaction through an ETF, but the amount of dividend you get is the same as if you had bought all 200 companies individually with the same amount of money. Yeah, with the same amount of money. 

Bryce: [00:05:20] So it is important to just understand the concept that it is based on the underlying assets and not every single company in that ETF may. Pay a dividend, but cumulatively you'll get the same amount of dividend payment as if you had owned all 200 or whatever the underlying assets are individually. 

Alec: [00:05:39] Yeah. And if you own a commodity ETF, for example, gold commodities themselves don't pay dividends because they're just tracking the price of the commodity. So that one, you won't get a dividend. Yeah. 

Bryce: [00:05:53] All right. So we've established that ETFs do pay dividends if the underlying assets of the ETF pay dividends or pay some sort of income back to the shareholders themselves. So then the next question is, well, do I get the cash as soon as that company pays the dividend? 

Alec: [00:06:10] And this is where it gets confusing because the answer is no, it is not a straight pass through. Instead of paying the dividend immediately, the ETF provider pulls that cash in, the cash component of the portfolio, goes to the casino, tries to hit red, and that's how they make their money. No, they pull the money in the cash component of the portfolio and then they pay it out at a regular or a consistent interval. Yeah. Now, Bryce, you might be asking why?

Bryce: [00:06:43] Well, it'd be chaos. 

Alec: [00:06:44] If a company pays a dividend. I want to get that cash straight away. But you're right, it would be chaos. 200 Australian companies in the ASX 200 ETF, they all pay at slightly different times and at different frequencies. Some pay quarterly, some pay half yearly, some pay yearly, all different dates. You might be getting a dividend on every day of the year. I mean, you could actually.

Bryce: [00:07:12] But yes, you're right there. They would be paying whenever it suits them. And if the ETF manager was trying to manage paying out BHP dividend, paying out common bank's dividend, paying out Westpac's dividend, it'd be chaos. So they accumulate all of it and just hit you up at a regular interval.

Alec: [00:07:29] Imagine how many I don't know if you get this, but with some of the brokers I'm signed up to, every time anything happens, like a dividend gets paid, I get an email. Yeah. Imagine how many emails you get. You know, it was a straight pass. 

Bryce: [00:07:40] Well, one of the beauties of having an ETF is that you just get one nice dividend payment rather than owning 50 ASX stocks and getting 50 separate dividend payments. 

Alec: [00:07:51] Imagine the tax reporting at the end of the year when you have to record all the dividends of your time nightmare. So to make it easier, they roll it up and pay you consistently. Yes. The question then, Bryce, how often do I get paid? 

Bryce: [00:08:07] So every ETF is different. It can be as regularly as every month. You will get paid a distribution or it can be up to once a year. So I had a look at my portfolio. The most frequent payment I get is from a Vanguard Australian Property ETF and it pays me a distribution or a dividend every quarter. So every three months I'll get a payment. Then one of my ASX 200 ETFs gives me a payment every six months, and then a number of my other ETFs pay me once a year. So it depends on the type of ETF that is the answer to that question. They don't pay the same is the short answer to how often do they pay? The best way to find out is just through the product page on the issue website. Go to Vanguard, go to Betashares, go to BlackRock, find your ETF, find the section that says distribution and it'll tell you how often they are going to pay you. Very straightforward. 

Alec: [00:09:05] Very straightforward. Well, Bryce, let's take a break there. And then on the other side, I want to talk about dividend reinvestment plans because you don't have to take your money in cash. 

Bryce: [00:09:14] No.

Alec: [00:09:17] All right, Bryce. Well, today we're talking about an ETF. So we're asking when, why and how an ETF paid dividends. Not really. Why? Well, sort of one bit. Where we want to go with the rest of this episode is to answer some of the common questions we get around dividend reinvestment plans because even that term is full of jargon, but that can be quite a powerful tool if you use them. So let's start by explaining what they are. Dividend Reinvestment Plan DRP. 

Bryce: [00:09:49] Well Ren. It's all in the name. A plan that reinvests your dividends.

Alec: [00:09:56] This wasn't some rule school that when you had to define a word, you couldn't use those words in the definition yet. 

Bryce: [00:10:02] Dividend reinvestment plan is the process of taking the dividends that you're paid and automatically reinvesting them back into the same investment. And it does that every single time that you get paid. The advantage in this Ren is that A you don't take the money into your bank account and accidentally spend it on something else. And B, it's a great way of just continuously building the size of that investment over a period of time and getting that sort of compound effect over a long period of time. 

Alec: [00:10:37] It's also forced dollar cost averaging in a way, because when you get paid the dividend, the that that money gets reinvested in that same asset regardless of what the share price is doing. 

Bryce: [00:10:49] Yeah. So to play it out in numbers, let's say I get paid a $50 dividend and I have a dividend reinvestment plan set up the, the issuer or the broker will then reinvest or the registry will then reinvest that $50 back into my ETF. Now there are some nuances to it. They might not be able to reinvest the 50 exactly because of the price at the time, but that remaining money will sit with the registry until the next dividend payment and they'll go again.

Alec: [00:11:21] Now, that's probably one of the most confusing things about dividend reinvestment plans. So let's unpack that a little bit more. I have a ETF that is $40 a share or $40 a unit. I get paid $50 in dividends. Must be nice with a dividend reinvestment plan. So my registry that is executing the reinvestment plan on my behalf says are 50 bucks for Ren. I can buy one unit for 40. What happens to the other ten? 

Bryce: [00:11:54] In most cases it sits with the company on the registry next to your name as a shareholder, and they then say next time that we pay a $50 dividend Ren you're going to have 60 bucks to reinvest. What's the unit price is still dollars, 40. And so that 20 then carries over. 

Alec: [00:12:13] So 30 and then 40, and then it buys two rather than one. 

Bryce: [00:12:17] Exactly. So you don't lose the money. You don't it's it's not like lost into the aether. It's still yours. You just own it. You deserve it. 

Alec: [00:12:26] You earned. 

Bryce: [00:12:26] But it's it's you just got to remember that it's not a nate. Every time you get paid a dividend, it's not innately reinvested again. 

Alec: [00:12:34] Now, here's a question I don't need to preface questions with. Here's a question. If I sell the ETF. Yeah, and there's money left with the registry, what happens to that money? 

Bryce: [00:12:46] This is from the Betashares website. One of the issues here in Australia, they say that you can claim payment for the residual credit balance associated with the dividend reinvestment plan via their registry. 

Alec: [00:13:00] So in simple terms, ask the registry for your money. 

Bryce: [00:13:03] Ask the registry. And for yeah, in simple terms, ask the registry. 

Alec: [00:13:07] Okay, nice and Bryce. I think a final question when it comes to dividend reinvestment plans is not all brokers allow you to do it. That's a statement, not a question. 

Bryce: [00:13:20] Yes. So to put that, what that really means is if your broker is a custodial model, you can't do dividend reinvestment plans because they only just have one unit registry. Essentially, you can't log in and say you're you can't control. 

Alec: [00:13:34] Your it's not held in your name. It's held like Citibank. Exactly. Or something. Yeah. 

Bryce: [00:13:38] That doesn't mean you don't get the dividends. It just means you can't do a dividend reinvestment plan. So, for example, I have some of my ETFs in Super Hero, which has a custodial model. I then just get paid the cash into my superhero wallet and then it is on me to manually reinvest those each time. So you can still do dividend reinvestment. You just have to do it manually. If the brokers here in Australia are chess, you can log into your registries. So Computershare or link market services and decide whether or not you want to do dividend reinvestment plans if they allow it for those holdings. So that is important to me. 

Alec: [00:14:17] Yeah, a little bit confusing, but I think my key takeaway from that is, you know, you mentioned that a lot of your ETFs are with Super Hero, I have ETFs and superhero as well. I get that cash and I just reinvest them outside of a dividend reinvestment plan. So yeah, if you're overwhelmed by that last explanation, it's okay. You get the same amount of money either way, just don't pull it out of your investment account and spend it on stuff. Right. Reinvest it. Yeah. And then net net, same result. 

Bryce: [00:14:50] Net net, same result. Well, that kind of brings us to the end Ren with.

Alec: [00:14:53] For people who are really going to be nit picky. Net net, same result, less brokerage cost. Sure. That brings us to the end. 

Bryce: [00:15:01] So we've established that yes, ETFs do pay dividends depending on the underlying assets that they pay at different frequencies or intervals throughout the year, and that if they allow you, you can do dividend reinvestment plans. Otherwise you just get the cash into your wallet or your bank account. So we've hope we hope we've been able to answer that question and clarified, if you have been wondering. But again, to close out, we have a bit of a bit of feedback from the community, which is great to hear. If you want to write to us, hit us up at contact@equitymates.com feedback. On the episode last week we did where we impersonated. 

Alec: [00:15:39] Yeah, Raiz, CommSec Pocket, and Spaceship.

Bryce: [00:15:42] Spaceship. Yes. Now we've got some additional feedback from Chris. He added that with CommSec pocket you have to actually buy whole shares. So we said that the minimum is 50, but as we've sort of alluded to in this episode, if your ETF is $70, you you minimum is going to need to be 70. So I think Sascha was impersonating CommSec pocket, so.

Alec: [00:16:06] I think that's fair enough from Sascha. Good, really good, really good build from Christopher but yes, great people. Yeah. 

Bryce: [00:16:12] Thank you. And he wants to know if we can do a superhero vs sharesies impersonation at some point.

Alec: [00:16:17] So I don't mind that we'll get Sasha back in and she can be a steak or something.

Bryce: [00:16:21] Yeah.

Alec: [00:16:21] I also don't mind. I reckon we do three ASX 200 ETFs. I mean 200. I'm vast. 

Bryce: [00:16:31] That would be very straightforward. But anyway, keep the feedback coming in. As I said contact@equitymates.com. And please, if you can write and review us through Apple, that would be really appreciated. Five stars. If you have anything less, just hit us up and give us the feedback. Personally, the reviews and ratings do go a long way to helping us on the podcast charts and getting in front of new investors just like you. So thanks for the support as always and Ren. We'll pick it up next week with the hundred dollar challenge. 

Alec: [00:16:57] Sounds good. I got to go to a survey.