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  • Dividend and index investing, how does it work? – THIS IS WHAT YOU NEED TO KNOW!
  • Dividend and index investing, how does it work? – THIS IS WHAT YOU NEED TO KNOW!

Dividend and index investing, how does it work? – THIS IS WHAT YOU NEED TO KNOW!

The dividend of index investing

Dividend is a profit distribution that you can receive as an investor if a company makes a profit. When investing in indexes with dividends, publishers deal with these dividends in different ways. It is not always easy to find out how dividend distributions are handled and many publishers of index trackers do not like to provide clarity about this to their customers. In this blog you will find a number of points of attention that you can think about if you want to invest with index trackers that pay out dividends.

Reinvest or pay out

If a dividend is paid for an index tracker, there are two possibilities. The dividend is paid or automatically reinvested.

Physical and synthetic index trackers

If there is a physical index tracker, the issuer has bought all the underlying shares and will therefore also receive the dividend. A synthetic index tracker works slightly differently. The issuer has then created an index tracker via derivatives, which can affect how dividends are dealt with.

Tax and dividend

Dividend tax is levied on every dividend. The amount of this tax depends on the country you live in. In the Netherlands, it is a percentage of 15%. Private individuals have the option to reclaim this tax via box 3 of their tax return. If the index tracker is located in another country, the tax rules that apply there apply. This tax cannot always be reclaimed and as a result your dividend is worth less; we then speak of dividend leakage. This is not a simple matter and this blog is therefore not exhaustive. It is wise to do more research into this or to ask a tax advisor to take a look if you want to invest in index trackers.

Last tip

Do thorough research on the publisher of the index trackers, see if they pay dividends and how this is arranged. If this looks good, you can see how it is arranged with the tax. If there is dividend leakage, this will be a small percentage.

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