Many people have queried whether STI ETF gives out dividends. The answer is YES! And yes to both SPDR and Nikko AM STI ETFs.
The follow up question would usually be “how does STI ETF give our dividends?” It is a more than a straight forward answer which I will explain the workings in this post.
Dividends From Stocks are not Paid Directly to Investors
Both SPDR and Nikko AM STI ETFs hold their assets with Trustees. This includes the dividends paid out to the Funds by the individual stocks under the Funds’ holdings. These dividends are withheld until the distribution dates. The dividends are deposited in cash, into investors’ designated bank account linked to the Central Depository (CDP). The mode of receiving the dividends is similar to other stocks listed on SGX.
Dividend Distribution Frequency
Nikko AM STI ETF – Semi-annually, around May and October each year.
SPDR STI ETF – Semi-annually, but dates were not stated in the prospectus. Based on historical payouts, the distributions to investors were in Jan and Jul each year. But the recent distributions were in Feb and Aug.
Fund Expenses are Deducted from Dividends
The Funds will take their fees from the dividends before distributing to the ETF investors. Hence, the dividends received by investors are lesser than the dividends received directly from the companies. As the Funds’ expenses are low, the dividends are more than enough to cover the fees and the excess will be distributed to investors. However, it is stated in both Funds’ prospectuses that in the event the dividends are not sufficient to cover costs, the Managers may sell some units or make short term loans to top up the difference.
[From Nikko AM STI ETF’s prospectus] To the extent possible, the Fund’s fees and expenses will be paid out of the dividends the Fund receives. To the extent dividends received by the Fund are insufficient to meet its fees and expenses, the excess will be met by disposing of part of the Fund’s portfolio of Index Shares and/or by short-term borrowing.
The expense ratio of SPDR and Nikko AM STI ETF are 0.3% and 0.28% per annum respectively.
(Thanks to Dennis Teo for pointing out that the Fund is not taxed for the dividends received.)
Taxes are Deducted from Dividends The dividends are deemed as income to the Fund Management Companies and hence, they incur corporate tax at 17%. This is one of the downsides of investing in an ETF, whereby dividends are further reduced by taxes. If you have bought the shares of the companies directly, the dividends will not be taxed.
Dividends Contribute to 30% of STI ETFs’ Returns
Although the dividends are lesser after the deduction of fees and taxes, dividends still contribute to 30% of STI ETFs’ returns.
Let’s look at the 10-year return of SPDR STI ETF vs the Index (I excluded Nikko AM STI ETF because it only has 3 years of history). Annualised Returns for the period of Jul 2003 to Jul 2013,
- Index = 7.53%
- SPDR STI ETF (Without dividends) = 7.48%
- SPDR STI ETF (With dividends reinvested) = 10.73%
Hence, dividends have increased the Fund’s returns by 3.25% per year. This constitutes 30% of the overall STI ETF Returns!
STI ETF provides a decent annual returns on your investment, provided you are able to tolerate the volatility as the stock market rises and falls. Without trying to pick your own stocks or to time the market, you can achieve 8-10% annual returns over the long run. I have showed that dividends payouts are important to the returns. It is important to note that the 10.73% annual returns is achieved by reinvesting the dividends. These dividends are paid out in cash into your bank account. Hence, you need to make an effort to reinvest this amount into the STI ETF again. Otherwise, your returns will be slightly lower.