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Many investors enjoy the dividend income that stocks produce on a quarterly — or in some cases, monthly — basis. What some investors may not realize is that exchange-traded funds (ETFs), which are baskets of stocks or other types of securities that trade on exchanges like a single stock, can also produce dividend income — just like a stock. In fact, there are ETFs that are designed for the primary purpose of generating dividend income.
How do dividends work in an ETF? ETFs pay out dividends based on the dividends distributed within the underlying stocks they hold. So, if there is an ETF that tracks the S&P 500, all the stocks within that fund that pay out dividends would be calculated and paid out to the ETF investors on a pro-rata basis. The dividends could also be used to reinvest in the ETF.
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While a dividend ETF will fluctuate based on the dividends in the underlying stocks, in particularly volatile markets, that diversification can be a good thing as some companies may be slashing or suspending dividends while others are raising or maintaining them. If you are looking for stable income, even in uncertain markets, here …
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