Dividend ETFs don't create wealth through payouts. Factor exposure, not the dividend, drives long-term returns. SPY data shows reinvestment added 2% annualized since 1993.
Dividend ETFs are a staple of many retail portfolios. The pitch is simple: collect the distributions, reinvest them, and watch compounding do the work. Backtesting supports the math. A $10,000 investment in the SPDR S&P 500 ETF Trust (SPY) at its 1993 inception would have grown to about $310,847 by mid-July 2026 with dividends reinvested, according to Testfolio. Without reinvestment, the same stake would be worth roughly $175,008. That is an annualized return of 10.82% versus 8.85%.
Yet the idea that dividend ETFs are superior investments because they pay income is a misconception. On the ex-dividend date, a stock's price typically adjusts downward by roughly the amount of the dividend. Cash leaves the company and goes to shareholders. The ETF's net asset value drops by the same amount. The distribution is not free money; it is a transfer.
What dividend ETFs actually do
Academic research on factor investing shows that many dividend ETFs inadvertently capture value and size exposure. A dividend yield is the annual payout divided by the share price. When a stock's price falls while the dividend stays the same, the yield rises. That means dividend screens tend to select companies that are out of favor, which is exactly the value factor. Many dividend payers are also mid- and small-cap companies, loading on the size factor. Both factors have historically delivered excess returns over long periods, according to factor investing research.
That is not the same as saying dividends themselves create wealth. The quantitative evidence suggests the outperformance comes from factor exposure, not from the act of paying dividends. Investors who buy dividend ETFs are getting a value and size tilt, often at a higher expense ratio than a plain-vanilla index fund.
The opportunity cost of dividend screening
Screening for dividends excludes companies that have created enormous shareholder wealth without ever paying a meaningful dividend. Berkshire Hathaway (BRK.B) has famously never paid one. Chairman Warren Buffett has compounded value by acquiring businesses and repurchasing shares when they traded below intrinsic value. The same logic applies to many growth companies that reinvest earnings rather than distribute them.
Taxes are another cost. Outside registered accounts, every dividend payment is a taxable event. Canadian eligible dividends get a dividend tax credit, but taxes still reduce the amount available for reinvestment. Holding dividend ETFs inside a registered account avoids that drag, but in a taxable account the annual distributions eat into compounding.
None of this means dividend ETFs are bad. They have helped many investors build wealth. The reason is not the dividend itself, but the factor exposure that comes with it. The choice comes down to whether a value-tilted, higher-cost strategy fits a portfolio better than a broad market-cap-weighted index. The SPY numbers show dividend reinvestment added about 2 percentage points a year since 1993. Whether a pure dividend ETF can beat that depends on the market environment for value stocks.
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