Dividend investing is a great way to increase your cash flow. Even if it can’t get you a yacht (yet) it is always nice to have some extra money. And what better way to do so than investing in some Vanguard exchange-traded funds (ETFs). But, do the Vanguard returns include dividends?
Vanguard average annual returns include changes in share price and reinvestment of dividends and capital gains. Thus, the quoted returns not only reflect the increase in share price but also include dividends.
We all love dividends. With enough, you can just lay down, relax, and enjoy that sweet, sweet passive income. Making you richer without even having to move a finger. With a big capital and a good yield, you can just play it safe and that may as well be all you need to enjoy the best life has to offer. Without having to worry about work or your investments going bust. Financial freedom. Well, that’s everybody’s dreams, isn’t it?
The Vanguard Group that manages $6.2 trillion dollars in global assets is the second biggest provider of ETFs on the market. And for good reason, their vast selection of ETFs are a great investment, outperforming the market more often than not. On top of that most funds also include dividends. If that makes your eyes glitter, you’re in the right place, read on!
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How do Vanguard ETF Dividends work?
Most Vanguard exchange-traded funds (ETFs) pay dividends on a regular basis, typically once a quarter or year. They include investments in one specific area in the stock market or the fixed-income realm.
In other words stocks and bonds investments pay dividends or interest, which Vanguard distributes back to its customers.
Vanguard offers over 60 ETFs that pay dividends: in specific sector stocks like the Vanguard Energy ETF or the Vanguard Health Care ETF, stocks of a certain market capitalization be it small, mid, or large-cap, foreign stocks included in the Vanguard Total International Stock Index Fund and bonds corporate and government of different durations and risk.
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Vanguard ETF Dividend Yields
ETFs dividend distributions are based on a 30-day SEC yield, a standardized yield measurement created by the Securities and Exchange Commission (SEC) to compare fund dividend returns. In simple terms the SEC yield is calculated based on the last 30-day period, it will tell us the income earned by the fund after deducting expenses.
In simple terms what the investor would earn in the next 12 months if the fund earned the same.
There’s over 60 Vanguard ETFs that pay dividends to investors, usually in the form of quarterly or annual distribution. Sometimes although quite uncommon, pay-outs happen on a monthly basis.
And as of February 2020 the 30-day SEC yield for Vanguard ETFs ranges between 0.08% and 4.97%, all depending on your investment strategy and risk tolerance.
Do Vanguard ETFs reinvest my dividends?
Fortunately yes, Vanguard does reinvest your dividends. It is done without commission thanks to their Brokerage Dividend Reinvestment Program.
Vanguard will automatically reinvest them by buying stocks included in the ETF instead of offering them to you through pay-outs.
This is great news for investors because reinvesting it continuously grows their shares and compounds their dividends. Over the long, that’s what builds huge wealth, just like Albert Einstein once said “Compound interest is the 8th wonder of the world. He who understands it earns it; he who doesn’t pay it.” And if that’s the opinion of one of the brightest men humanity has ever been blessed with, well maybe we should believe it.
Although if you choose so, maybe because of an increase in risk in your portfolio or a need for cash, you can always opt-out of the program.
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Are Vanguard ETFs dividends taxed?
But is there something you’re forgetting? Like I don’t know, taxes? Well, Uncle Sam may have something to say about that. So to avoid an unhappy taxman knocking at your door, we better answer the question. Yes, they are. But we have to make an important distinction. Dividends can be qualified or non-qualified, and they’ll be taxed accordingly.
Qualified dividends will receive special tax treatment. These include most payments from stocks of U.S. corporations as long as you own them long enough.
Foreign companies traded on the American Depositary Receipts (ADRs) or on the U.S. market are often also qualified.
But what qualifies in the eyes of the IRS as “long enough”? The answer is kind of tricky, but typically, you have to own it for more than 60 days during the 121-day period that began 60 days before the ex-dividend date. Sounds more complicated than it is, the ex-dividend date simply means the day the company decides you have to own the stock to receive the dividend.
So the same goes for Vanguard ETFs, the dividends are qualified if the fund has owned the stock for more than 60 days before the ex-dividend date. And you of course must invest in the fund when this criterion is still satisfied
If this is the case, your dividends will be taxed at 0%, 15%, or 20% tax rate, depending on your level of taxable income.
Dividends that do not satisfy these criteria are called “nonqualified” and are taxed at your income tax rate. You will of course be taxed a lot more, so be careful with your timing when you invest in a Vanguard ETF. It could make a big difference. Also hiring a tax advisor could prove of great help.
To report dividends to the IRS use a Form 1099-DIV.
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Conclusion
Dividends are a great way to compound wealth. Vanguard offers a wide selection of ETFs that include them, over 60 in fact. Some are riskier and thought for the short term, some are safer and made for the long term. But always keep in mind your risk tolerance when choosing one, even with dividends, the risk can still be there.
If you prefer a more passive style of investing, going with a Vanguard fund can prove a great idea and build up a huge fortune.
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