Average Dividend

Investing in bonds individually can be challenging for average investors because bonds, despite their vast number of offerings, trade on disparate, over-the-counter markets, making buying and selling bonds non-standard financial transactions with less liquidity and price transparency. However, investing through bond ETFs that quote and trade like stocks on an exchange provides investors the convenience of having the same benefit as from direct bond investments. Because bond ETFs often invest in portfolios of bonds with different maturities and varied coupon terms, interest payments received by ETFs from various bond issuers are totaled and reported as an average coupon rate.

Interest-Income Dividend

Bond ETFs often pay interest-income dividend once every month to reflect the continual interest payments made by bonds of different maturities. Because of the liquidity issue in bond trading, even ETFs may not be able to purchase all the bonds in the bond index they intend to track. Generally, government bonds are more liquid than corporate bonds on the secondary market. Many bond ETFs are only representative samples of their respective indexes. Therefore, dividend paid by bond ETFs for the distribution of interest payments may not fully reflect coupon payments of the bond index as reported.

Taxes on Dividends

References

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