Do Index Funds Pay Dividends?

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Investing in index funds is a surefire and easy way to collect passive income via dividends. The easiest way to invest in index funds is to buy shares of an exchange traded fund (ETF) on the stock market, just like buying any other stock. Alternatively, you could buy shares of an index aligned mutual fund through a fund manager like Vanguard. ETFs and mutual funds both have their pros and cons. Additionally, if you want to supercharge your dividend income stream, you could invest in a dividend index fund. These funds invest exclusively in dividend-paying companies. Fund managers select these companies based on specific attributes such as size, industry, geographic region, and dividend history.

Do Index Funds Pay Dividends?

Index funds are investment vehicles that track a specific market index within the stock market, such as the S&P 500 or the DJIA (Dow Jones Industrial Average). These funds hold a selection of stocks matching the index which they track, and offer you a simple way to buy the entire index at once. This has the added benefit of diversifying your portfolio. Dividend index funds and dividend ETFs are a subset of index funds that only invest in holdings of companies that pay dividends. The price of these funds and the value of dividends paid can fluctuate based on market conditions. While the price of ETFs fluctuate many times per day in line with the stock market, mutual funds are only priced once daily, at the end of each day.

Dividend index funds and dividend ETFs are designed to provide you with a steady stream of passive income by paying dividends. You can either withdraw the dividend income as cash, or reinvest it by buying more shares in the fund. They can be a great tool if you’re looking to increase cash flow and diversify your investments.

The Vanguard High Dividend Yield ETF (VYM) is a notable example of an index fund that pays a high dividend yield by investing in a diversified portfolio of high dividend-yielding U.S. stocks. The fund has returned close to 10% dividends per year for the past 10 years.

Key points:

  • Dividend Distribution: The process where the fund collects dividends from the stocks it holds and then distributes a share of that income to the investors.
  • Example: Vanguard High Dividend Yield ETF (VYM) is known for distributing dividends to its investors, courtesy of its diversified portfolio of high dividend-yielding stocks.

How Do Index Funds Distribute Dividend Income?

dividend rate vs apy stack of cash

The process of dividend distribution in index funds is quite straightforward. When the companies in the fund’s portfolio declare dividends, the fund collects these dividends. Periodically, the fund tallies up all the dividend income and distributes it to you via your broker. You receive a share of the total dividend income, based on how many shares of the fund you own.

Key points:

  • Collection and Distribution: The index fund collects dividends from the companies inside the fund and distributes them to you and the other investors.
  • Per Share Distribution: Dividend income is distributed on a per-share basis, so the amount you and the other investors receive is proportional to the number of shares owned.

How Often Do Index Funds Pay Dividends?

The frequency of dividend payments varies from one index fund to another. Some funds distribute dividends on a quarterly basis, while others might do it annually. If you’d like to know when a fund pays dividends, have a read of the fund’s prospectus. Its website also usually provides you information on how often dividends are paid.

Key points:

  • Quarterly vs Annual: Some funds like the Vanguard Dividend Appreciation ETF (VIG) distribute dividends quarterly, while others payout their dividends annually.
  • Information Source: The fund’s prospectus and website are good sources for dividend distribution frequency.

Index Fund Dividends And Fees

All funds charge you a management fee. It’s important to note that the fee is a percentage of your total investment and not a percentage of your dividends earned. Knowing the fee structure is important as it affects your overall return from the fund. Lower fees mean you get to keep more of your dividend income. It’s a good idea to compare fees across different funds before handing over your hard-earned cash.

The fees that Index funds charge can range anywhere from 0.04% to 1.60%. If you consider that the average annual return of the S&P 500 since inception is about 10%, an S&P index fund with an expense ratio of 1.60% could cut down your annual return by 16%. It’s generally thought that the fees charged for managing an index fund should be substantially less than the fees for a regular fund. This is because ‘active’ management is not required – the makeup of the fund is an automated process that tracks the addition and removal of stocks within the index. However, there are exceptions such as funds that track a subsector of the index which require more management than a completely pasive fund.

Key points:

  • Fee Structure: Fees can eat into your dividend income, and are collected by the fund prior to you receiving your dividend. Index funds should generally have low fees compared to regular funds.
  • Fee Comparison: Comparing the fees of different index funds like the Schwab U.S. Dividend Equity ETF (SCHD) and the iShares Select Dividend ETF (DVY) can help you find a fund with a reasonable fee structure that maximizes your dividend income.

 Exploring Top Dividend Index Funds and Dividend ETFs

top dividend index funds

If you’re thinking about investing in dividend-paying index funds, you should consider three key factors. The top three factors to consider when choosing dividend-paying index funds are:

  • Dividend Yield:
    The dividend yield gives an indication of the income you can expect to receive from your investment relative to its cost. A higher dividend yield can provide a steady stream of income, which is often a primary goal for investors in dividend-paying index funds. However, funds with high returns might have other drawbacks to be considered, such as a lack of growth in the value of the fund.
  • Expense Ratio:
    The expense ratio can significantly impact your overall returns. A lower expense ratio means more of the fund’s returns are passed on to you, the investor, which is especially important in a dividend-focused investment strategy. It’s fairly widely accepted that index funds don’t require a lot of active management by the fund manager, since they just mirror the index. But, there may be other reasons for higher fees, and you should do your due diligence on the fund before deciding to invest.
  • Diversification:
    Diversification reduces risk by spreading your investment across a variety of sectors and companies. A well-diversified dividend index fund can provide a level of protection against the volatility associated with investing in a single sector or a small group of companies, while still providing the potential for a steady dividend income. Some index funds are designed to be diversified, while others are specifically designed to invest in just one industry, country, or sector.

8 Best Dividend Index Funds

If you’re thinking of investing in an index fund, the following funds are a good place to start:

ETF NameDividend YieldExpense Ratio
SPDR Portfolio S&P 500 High Dividend ETF (SPYD)5.15%0.07%
Invesco S&P 500 High Dividend Low Volatility ETF (SPHD)4.97%0.30%
iShares Select Dividend ETF (DVY)4.02%0.39%
Schwab U.S. Dividend Equity ETF (SCHD)3.69%0.06%
Vanguard High Dividend Yield ETF (VYM)3.25%0.06%
First Trust Morningstar Dividend Leaders Index Fund (FDL)4.48%0.45%
iShares Core High Dividend ETF (HDV)4.12%0.08%
WisdomTree U.S. Quality Dividend Growth Fund (DGRW)2.89%0.28%

A Closer Look at Prominent Dividend Index Funds and ETFs

Invesco S&P 500 High Dividend Low Volatility ETF

Invesco S&P 500 High Dividend Low Volatility ETF (SPHD) is a popular choice among investors looking to invest in dividend index funds. The fund tracks the S&P 500 Low Volatility High Dividend Index, which includes 50 securities with the highest dividend yields in the S&P 500 Index that have also demonstrated low volatility over the past 12 months. The fund has an expense ratio of 0.30%, a dividend yield of 4.97%, and $2.84 Billion funds under management.

Vanguard High Dividend Yield ETF

Vanguard High Dividend Yield ETF (VYM) is another popular dividend index fund that tracks the FTSE High Dividend Yield Index. The fund invests in stocks of companies that have a high dividend yield and a long-term record of paying dividends. The fund has an expense ratio of 0.06%, a dividend yield of 3.25%, and has $59.4 Billion funds under management.

Why Invest in Dividend Index Funds? Benefits and Drawbacks



  • Low costs: Index funds usually have a lower expense ratio than actively managed funds.
  • Instant diversification: investing in an index fund generally provides you with instant investment in a wide variety of industries, sectors, and geographies. This in turn reduces risk.
  • Long-term growth: Index funds have historically grown consistently, meaning your investment will be growing at the same time as providing you with passive dividend income.
  • Transparency: Since index funds track an established index, you know exactly what you are investing in.


  • Limited upside: Since an index fund tracks a market index, like the S&P 500, it usually won’t outperform the market. Keep in mind that this can also be a benefit since many actively managed funds also don’t outperform the market.
  • No active management: Index funds do not have fund managers actively managing them on a daily basis. This means the fund is more prone to impacts from market downturns. Likewise, they also may not perform as well as other types of funds during bull markets.

Types of Dividends and Tax Considerations

Dividends are a portion of a company’s profits that are distributed to you as a shareholder. Companies generally pay dividends in the form of cash or additional shares of stock. Cash dividends are the most common type of dividend, and they are paid out of the company’s profits. Stock dividends are less common and are paid out in the form of additional shares of stock. Here are some additional details on the types of dividends:

  • Cash dividends: A payment made by a company to its shareholders in the form of periodic distributions of cash (as opposed to in stock or any other form). For example, Coca-Cola paid out a quarterly dividend of $0.42 per share in 2022.
  • Stock dividends: A dividend payment made in the form of additional shares of stock. For example, Apple paid out a 4-for-1 stock split in 2020.
  • Property dividends: A dividend payment made in the form of assets, such as products or services, instead of cash or stock. For example, Diamondback Energy paid out dividends in the form of property in 2022. The company paid a special dividend of $1.00 per share in the form of a transfer of 1.0% overriding royalty interest in certain oil and natural gas properties.

Besides stocks, bonds are another asset class where you can receive dividends. Bond dividends are typically known as interest payments.

DRIP Dividend Reinvestment Plan

A dividend reinvestment plan (DRIP) is a strategy where you can choose to automatically reinvest your dividends to grow your investment portfolio. A DRIP can help you take advantage of compounding returns, which increase your long-term investment gains. For example, if you own 100 shares of an ETF that pays a $1 dividend per share, you can choose to reinvest the $100 dividend payment to purchase additional shares of the ETF. Over time, your investment portfolio can grow significantly through the power of compounding returns.

Net Investment Income (NII) Tax: Understanding the Tax Implications of Dividend Income

You should also be aware of the tax implications of dividend income. Dividend income is subject to the Net Investment Income (NII) tax, which is a 3.8% tax on investment income for high-income earners. For example, if you have an adjusted gross income of $250,000 or more and you receive $10,000 in dividend income, you would owe an additional $380 in NII tax.

Dividend Investing Beyond Index Funds

High performing index funds

Dividend Stocks vs Index Funds: Where Should You Invest?

The decision between investing in individual dividend stocks or dividend index funds hinges on your investment goals and risk tolerance. While individual stocks might offer higher dividend yields, they come with higher risk due to a lack of diversification. They also require active management on your behalf. On the other hand, passively managed dividend index funds offer a more diversified exposure to dividend-paying stocks, spreading the risk across many stocks.

Dividend Aristocrats of the S&P 500: A Look at Consistent Dividend Payers

Dividend Aristocrats represent a select group of companies in the S&P 500 known for their exceptional dividend-paying records. They are the epitome of consistent dividend payments, having not only paid dividends but have also increased them annually for a minimum of 25 years. This consistent increase in dividends showcases a company’s financial stability and strong performance over time. Investing in these companies or in funds that track the Dividend Aristocrats can offer a reliable source of dividend income, along with the potential for capital appreciation.

The list of Dividend Aristocrats is publicly available and can be accessed through the official S&P 500 Dividend Aristocrats Index website or financial news and investment platforms.

  • Criteria: Besides a history of increasing their dividends every year for the past 25 years, companies need to also meet certain market capitalization and liquidity requirements to be part of the Dividend Aristocrats list.
  • Annual Review: The list of Dividend Aristocrats is reviewed annually to ensure that the companies listed continue to meet the stringent criteria.

Examples of Dividend Aristocrats

  • Procter & Gamble (PG): A consumer goods giant with a long history of dividend payments.
  • Johnson & Johnson (JNJ): A healthcare behemoth known for its stable dividend payout.
  • The Coca-Cola Company (KO): A global beverage leader with a strong dividend history.

Investing in Dividend Aristocrats

You could choose to invest in individual stocks of Dividend Aristocrats to potentially benefit from the long-term dividend growth. Alternatively, there are index funds and ETFs like the ProShares S&P 500 Dividend Aristocrats ETF (NOBL) that track the S&P 500 Dividend Aristocrats, providing a diversified exposure to these consistent dividend payers.

Dividend Aristocrats’ Potential Benefits

  • Stable Income: The consistent dividend payout can provide you with a stable income stream, which can be particularly attractive in uncertain market conditions.
  • Capital Appreciation: Besides dividends, investing in Dividend Aristocrats can also provide capital appreciation over time as these companies are often industry leaders with strong financials.

By reviewing the list of Dividend Aristocrats and possibly incorporating them or the funds that track them in your investment portfolio, you might position yourself for a steady stream of dividend income and potential capital growth. This approach to investing hinges on the proven financial robustness and the long-term dividend payment histories of these iconic companies within the S&P 500.

Sector-Specific Dividend Funds

Sector-specific dividend funds focus on industries known for high dividend payouts. For instance, utility and real estate sectors include companies with high dividend yields. The Utilities Select Sector SPDR Fund (XLU) is an example of an index fund that invests in utility companies within the S&P 500. Similarly, the Real Estate Select Sector SPDR Fund (XLRE) targets real estate companies. These funds provide an opportunity to earn dividends from specific sectors, but keep in mind they carry more risk due to being less diversified compared to broader market funds.

ETF Fees and Other Costs

Every fund has associated costs, like the expense ratio, which is a yearly fee expressed as a percentage of average assets under management. For example, if a fund has an expense ratio of 0.10%, you’ll pay $10 annually for every $10,000 invested. It’s crucial to be aware of these fees as they can eat into your dividends and overall returns. Other costs might include transaction fees when buying or selling shares. Always review the fund’s prospectus to understand the fee structure.

Can You Live off ETF Dividends?

Wants vs Needs Expensive Car

Living off dividends is an investment strategy followed by a lot of investors. However, living off ETF dividends requires a substantial investment. For example, if an ETF has a dividend yield of 4%, to generate an annual income of $50,000 you’d need to have $1.25 million invested. It’s a sizable amount, but if you’ve amassed significant savings, it could be a viable strategy. However, given the volatility of the stock market, it would be wise to not rely solely on dividend income.

As an example, the Invesco S&P 500 High Dividend Low Volatility ETF (SPHD), could be a source of regular income. The fund is currently paying a 4.97% dividend and invests in companies with a history of increasing their dividends. If you invest $200,000 in the SPHD fund with a 4.97% dividend yield, you would receive about $10,000 in dividends annually. This income could be used to cover your living expenses or reinvested to grow your investment further. By selecting funds with a history of strong dividend performance, you can create a steady income stream to complement your other income sources.

Frequently Asked Questions


  • Marcus Anderson

    Marcus Anderson is a seasoned investment specialist and a key contributor to MoneyMaver. With a passion for making investing accessible to everyone, Marcus has dedicated his career to simplifying the world of finance and helping people make informed investment decisions. Marcus holds a degree in Finance from the University of Pennsylvania's Wharton School and has over a decade of experience in the financial sector. He started his career as an investment analyst for a major Wall Street firm, where he honed his skills in financial analysis and investment strategy.

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