Bill Gates: King of All Farmlands (Dividend ETFs)

The educational component of this newsletter focuses on Dividend ETFs

The Q.ai team celebrating our Beta launch

There are, like, a billion antitrust lawsuits that are unresolved, acquisitions that may or may not happen and flip flopping on whether certain Chinese tech companies should be banned in the U.S. Just like the cliffhanger on the most previous episode of The Bachelor, this week can be summed up in three words: To be continued…

As promised, here’s our investing new year’s resolution: to empower as many new investors as possible with our newsletter – as well as with our investing app, Q.ai.

We’re excited to share that users on our Early Access waitlist will start receiving invites to open an account as soon as next week. If you are interested in joining the waitlist, you can do so here.

This Week’s Biggest Headlines

  • Earnings SZN is here and JPMorgan is already making everyone else look bad. The company’s fourth quarter revenue of $30.16 billion exceeded analysts’ estimates of $28.7 billion. Read more.
  • Twitter and Facebook have seen a combined $51.2 billion erased from their market caps since banning President Trump from its platforms. Trump was removed from both social media platforms following the Capital riot that took place last Wednesday. Twitter CEO Jack Dorsey has spoken out about the ban, stating that he supports the decision but warns that it sets a dangerous precedent. Read more.
  • Staples is trying to buy Office Depot’s parent company again. They say “third time’s a charm,” and despite previously abandoning it due to antitrust scrutiny, Staples is revisiting its $2.1 billion deal. If you expect this to be the last time the word “antitrust” is mentioned in this newsletter, spoiler alert: it won’t be. The DOJ and FTC has its work cut out for them this year and this is only the beginning. Read more.
  • Visa walks away from its $5.3 acquisition of Plaid after the DOJ threatened to block the deal. The SF-based startup works with financial apps such as Venmo, Square, and Q.ai , and connects users to their bank accounts. In the last year, its customers grew by 60%. Read more.
  • Bill Gates has earned the title of “America’s biggest private farmland owner.” You see, Bill is just like us. The main difference is that the only things we can afford are houseplants and flour to make bread. This is how he chooses to pass the time: by quietly buying 242,000 acres of farmland across 18 states. Read more.

We imagine Bill and his friends celebrating his new title in this exact same fashion

  • Tencent, Alibaba and Baidu are no longer on America’s naughty list. Chinese tech companies have frequently made headlines for its impressive short-term growth and the Trump administration’s determination to blacklist the companies due to national security concerns. Read more.
  • Amazon’s e-book business is being investigated for, you guessed it, antitrust violations. Remember how Amazon was just a marketplace for books? Jordan Firstman’s impression of Bezos in 1995 is hilar. Read more.
  • Zoom is on the come-up and investors want back in. After dropping more than 40% from its October highs, Zoom’s stock rebounded after conducting a public stock offering which raised $1.75 billion. Zoom was already a profitable company, so all signs point to a possible acquisition. Read more.
  • Google is closing in on its Fitbit acquisition – without DOJ approval. In the world of antitrust inquiries, it’s a bold move on Google’s part. Many will initially point out that Fitbit has nothing to do with Google’s core lines of business. However, it’s safe to assume that Google, Facebook and Amazon would still get flagged for an antitrust inquiry even if they tried to buy a lemonade stand. Read more.

What a dividend ETF is

TL;DR

Dividend ETFs focus on bringing in income through dividend returns. These passively managed funds usually have low expense ratios while providing higher dividend payments than other types of ETFs.

You can divide dividend ETFs into several categories, such as:

  • Dividend aristocrat ETFs, which have consistently raised dividend payments for 25 consecutive years or more
  • High vs low yield ETFs; high-yield ETFs pay more but come with higher risks, while low-yield ETFs pay less but are usually more stable
  • Domestic vs international ETFs; while domestic ETFs invest in companies that have home bases in the United States, international ETFs look beyond our borders for potentially valuable investments
  • Quarterly vs monthly payment ETFs, which pay dividends four or twelve times per year, respectively

Refresher: ETFs, or exchange-traded funds, are “baskets” of securities sold in shares, just like stocks. The difference is, with an ETF, you’re purchasing partial shares of dozens to hundreds of stocks.

Many ETFs track specific indices, which means they fill their basket with stocks or bonds included in a particular index. Additionally, these ETFs often maintain a minimum percentage of securities from these indices, often ranging from 80% to 90%. ETFs may also follow industry sectors or market capitalization.

What is a Dividend ETF?

Dividend ETFs are a type of ETF that focus on gains, specifically by selecting securities that pay dividends to investors

  • May include common and preferred stocks as well as real estate investment trusts (REITs)
  • Contains either or both domestic and foreign investments, depending on the underlying index
  • Many are passively managed, which reduces administrative fees and increases returns

Typically, dividend ETFs are recommended for risk-averse, income-oriented investors. The key is to choose funds that also have low expense ratios, which means you lose less of your profit to the fund manager. 

Benefits of Dividend ETFs

  • One way to supplement your monthly or annual income
  • Many have lower expense ratios compared to actively managed funds
  • One way for investors to protect themselves in highly volatile markets
  • In times of economic instability, ETFs that guarantee dividends provide safe haven against the financial storm
  • ETFs of any kind are an excellent way to diversify your portfolio
  • Purchasing even a single share of an ETF exposes your portfolio to dozens – if not hundreds – of securities in one go. This act alone can help reduce volatility, increase stability, and even the playing field within your portfolio.

Risks of Dividend ETFs

  • Because you’re investing in a pre-determined basket of securities, you end up with a blended yield of whatever’s inside the basket. This means that, if one company increases its dividend while another decreases, you don’t benefit evenly – you’ll receive a blend or an average of the new yields.
  • Not all dividend-paying ETFs generate high returns, especially when inflation and management fees are taken into account
  • Just because an ETF pays a dividend doesn’t mean that you’ll come out on top every time. The best way to combat this risk is through thorough research of your potential investments.

Types of dividend ETFs

While there are no static metrics for determining types of dividend ETFs, there are a few ways to categorize them. We’ll cover some of these here.

Dividend Aristocrat ETFs: what investors think of when they’re considering high-yield securities. 

  • Made up of stocks that are members of the S&P 500
  • All have individual market capitalizations of $3 billion or more and a history of steady cash flow
  • Some – but not all – of these companies are also “blue chip” companies.

High-Yield vs Low-Yield Dividend ETFs: When you’re looking for dividend ETFs, you can either look for incredibly high yields or potentially stabler, lower yields.

  • Higher-yield securities often come with more risks, such as the issuing company cutting dividend payments. For some investors, the higher payoffs are worth the risk; for others, lower, predictable yields are preferable.
  • While it may seem counterintuitive, there are cases where owning low-yield dividend ETFs make sense. For instance, some ETFs may provide low yields because they’re rerouting capital back into developing the firm. This may hint toward future earning potential and capital gains.

Domestic vs International ETFs: Many investors throw their money into the market with a “home country” bias.

  • Some larger companies, such as Apple and Starbucks, do operate both domestically and internationally, but they still count as domestic ETFs.
  • International ETFs can help protect against the ups and downs of national financial cycle. By increasing exposure, investing in international dividend ETFs can actually reduce your overall risk in the market.

Quarterly vs Monthly Payment Dividend ETFs: While owning one or two shares of an ETF may not earn much in the course of three months, the more you own, the more money you make.

  • Some ETFs offer monthly payments instead. These offer benefits in terms of ease of accounting, as well as the ability to rely on steady, monthly cash flow.
  • Additionally, if such monthly dividends are reinvested rather than spent, they tend to yield greater total returns over time

The Bottom Line

As with all ETFs, dividend-focused funds come with several benefits, as well as a few risks. Dividend ETFs allow investors to predictably supplement their annual income with dividend payments. This makes them ideal for hedging against low-rate or highly volatile markets.

Furthermore, just because an ETF pays a dividend doesn’t mean that that dividend will be worth the cost of entry in the long run. As with any investment, it’s important to research past performance and current holdings to get an idea of if the fund may pay off in the future.

Casually Explained has created some truly hilarious videos about investing. We suggest starting with this video, “How to Read the Stock Market.” However, you’d be foolish for not also watching his playful take on the investor community in the video “People Who Are Into the Stock Market.”