Can a non dividend-paying product (say ETF) suddenly start paying dividends?
Yes, absolutely. Consider Microsoft,  Updated Jan. 17, 2003 11:59 p.m. ET  Software giant Microsoft Corp.,   finally bowing to mounting pressure to return some of its huge cash   hoard to investors, said it will begin paying a regular annual   dividend to shareholders. From Wall Street Journal. Thus, for the years prior to 2003, the company didn't pay dividends but changed that. There can also be some special one-time dividends as Microsoft did the following year according to the Wall Street Journal: The $32 billion one-time dividend payment, which comes to $3 for each   share of Microsoft stock, could be a measurable stimulus to the U.S.   economy -- and is expected to arrive just in time for holiday   shopping. Course companies can also reduce to stop dividends as well.
Ok you're looking at this in a very confusing way. First, as said by CapitalNumb3rs, the dividend yield is the dividends paid in the year as a percent of the stock price. Given this fact then if the stock price moves down and the dividend stays the same then the yield increases. Company's don't usually pay out on a yield basis, that's mostly just a calculation to measure how strong a dividend is. This could mean either A. The stock is underpriced and will rise which will lower the yield to a more normal level or B. the company is not doing as well and eventually the dividends will decrease to a point where the yield again looks more normal.   Second off let's look at it in a more realistic way that still takes into account your assumptions:  **YEAR 1** 1. Instead of assuming buying 35% let's put this into a share amount. Let's say there are 1,000,000 shares so you just bought 350k shares for $700k. You paid a price of $2/share. Let's assume the market decides that's a fair price and it stays that way through the end of year 1. This gives us a market capitalization of $2 million.  2. The dividend paid out at year 1 is $60k so you could calculate on a per share basis which would be a dividend of $60k / 1 million shares or a $0.06 dividend per share. Our stock price is still at $2.00 so our yield comes out to $0.06 / $2.00 or 3.0%  **YEAR 2** Assuming no additional shares issued there are still a total of 1 million shares outstanding. You owned 350k and now want to purchase another 50k (5% of outstanding share float). The market price you are able to purchase the 50k shares at has now changed which means that share price is now valued at $1.50 / share. We have a dividend paid out at $100k, which comes out to a dividend per share of $0.10. We have a share value of $1.50 and the $0.10 dividend per share giving us a new yield of 6.66%.   **CONCLUSION:** There are many factors that can cause a company's stock price to fluctuate, some of it is hype based but some of it is a result of material changes. In your case the stock went down 25%. In most scenarios where a stock would have that much decline it would likely either not have been paying a dividend in the first place or would maybe not be paying one for much longer. Most companies that pay dividends are larger and more mature companies with a steady, healthy and predictable cash flow. Also most companies that are that size would not trade a stock under $3.00, I know this is just an example but the scenario is definitely a bit extreme in terms of the price drop and dividend increase. Again the yield is just a calculation that depends on the dividend that is usually planned in advance and the stock price that can fluctuate for many reasons. I hope this made everything more clear and let me know if you have any other questions. Here're some findings upon researches: Two main things to watch out for: Estate tax and the 30% tax withholding. These 2 could be get around by investing in Luxembourg or Ireland  domiciled ETF. For instance there's no tax withholding on Ireland domiciled ETF dividend, and the estate tax is not as high. (source: BogleHead forums)  Some Vanguard ETF offered in UK stock market: https://www.vanguard.co.uk/uk/mvc/investments/etf#docstab. Do note that the returns of S&P 500 ETF (VUSA) are adjusted after the 30% tax withholding! Due to VUSA's higher TER (0.09%), VOO should remain a superior choice. The FTSE Emerging Markets and All-World ETFs though, are better than their US-counterparts, for non-US residents. Non-US residents are able to claim back partials of the withhold tax, by filing the US tax form 1040NR. In 2013, non-US resident can claim back at least $3,900. Kindly correct me if anything is inaccurate. "Let me provide a general answer, that might be helpful to others, without addressing those specific stocks. Dividends are simply corporate payouts made to the shareholders of the company.  A company often decides to pay dividends because they have excess cash on hand and choose to return it to shareholders by quarterly payouts instead of stock buy backs or using the money to invest in new projects. I'm not exactly sure what you mean by ""dividend yield traps.""  If a company has declared an dividend for the upcoming quarter they will almost always pay.  There are exceptions, like what happened with BP, but these exceptions are rare.  Just because a company promises to pay a dividend in the approaching quarter does not mean that it will continue to pay a dividend in the future.  If the company continues to pay a dividend in the future, it may be at a (significantly) different amount. Some companies are structured where nearly all of there corporate profits flow through to shareholders via dividends.  These companies may have ""unusually"" high dividends, but this is simply a result of the corporate structure.    Let me provide a quick example: Certain ETFs that track bonds pay a dividend as a way to pass through interest payments from the underlying bonds back to the shareholder of the ETF. There is no company that will continue to pay their dividend at the present rate with 100% certainty.  Even large companies like General Electric slashed its dividend during the most recent financial crisis.  So, to evaluate whether a company will keep paying a dividend you should look at the following: Update: In regards to one the first stock you mentioned, this sentence from the companies of Yahoo! finance explains the ""unusually"" dividend: The company has elected to be treated as a REIT for federal income tax purposes and would not be subject to income tax, if it distributes at least 90% of its REIT taxable income to its share holders." For the Roth the earnings: interest, dividends, capital gains distributions and capital gains are tax deferred. Which means that as long as the money stays inside of a Roth or is transferred/rolled over to another Roth there are no taxes due. In December many mutual funds distribute their gains. Let's say people invested in S&P500index fund receive a dividend of 1% of their account value. The investor in a non-retirement fund will be paying tax on that dividend in the Spring with their tax form. The Roth and IRA investors will not be paying tax on those dividends. The Roth investor never will, and the regular IRA investor will only pay taxes on it when they pull the money out. It may be true for a bond fund.  But it is not true for bond etf.  Bond etf will drop by the same amount when it distribute dividend on ex-dividend date. "There are a few reason why the stock price decreases after a dividend is paid:  What's the point of paying a dividend if the stock price automatically decreases? Don't the shareholders just break even? Companies have to do something with their profits. They beholden to their shareholders to make them money either by increasing the share value or paying dividends. So they have the choice between reinvesting their profits into the company to grow the business or just handing the profits directly to the owners of the business (the shareholders). Some companies are as big as they want to be and investing their profits into more capital offers them diminishing returns. These companies are more likely to pay dividends to their shareholders. I assume the price of the stock ""naturally"" increases over the year to reflect the amount of the dividend payment. This is kind of a vague question but then doesn't it make it difficult to evaluate the fluctuations in stock price (in the way that you would a company that doesn't pay a dividend)? It depends on the company. The price may recover the dividend drop... could take a few days to a week. And that dependings on the company's performance and the overall market performance.  With respect to options, I assume nothing special happens? So say I bought $9 call options yesterday that were in the money, all of a sudden they're just not? Is this typically priced into the option price? Is there anything else I need to know about buying options in companies that pay dividends? What if I had an in-the-money option, and all of a sudden out of nowhere a company decides to pay a dividend for the first time. Am I just screwed? One key is that dividends are announced in advance (typically at least, if not always; not sure if it's required by law but I wouldn't be surprised). This is one reason people will sometimes exercise a call option early, because they want to get the actual stock in order to earn the dividend. For ""out of the ordinary"" large cash dividends (over 10% is the guideline), stock splits, or other situations an option can be adjusted: http://www.888options.com/help/faq/splits.jsp#3 If you have an options account, they probably sent you a ""Characteristics and Risks of Standardized Options"" booklet. It has a section discussing this topic and the details of what kinds of situations trigger an adjustment. A regular pre-announced <10% dividend does not, while a special large dividend would, is what I roughly get from it. That ""Characteristics and Risks of Standardized Options"" is worth reading by the way; it's long and complicated, but well, options are complicated. Finally, do all companies reduce their stock price when they pay a dividend? Are they required to? I'm just shocked I've never heard of this before. The company doesn't directly control the stock price, but I do believe this is automatic. I think the market does this automatically because if they didn't, there would be enough people trying to do dividend capture arbitrage that it would ultimately drive down the price." Your investment is probably in a Collective Investment Trust. These are not mutual funds, and are not publicly traded. I.e. they are private to plan participants in your company. Because of this, they are not required* to distribute dividends like mutual funds. Instead, they will reinvest dividends automatically, increasing the value of the fund, rather than number of shares, as with dividend reinvestment. Sine you mention the S&P 500 fund you have tracks closely to the S&P Index, keep in mind there's two indexes you could be looking at: Without any new contributions, your fund should closely track the Total Return version for periods 3 months or longer, minus the expense ratio. If you are adding contributions to the fund, you can't just look at the start and end balances. The comparison is trickier and you'll need to use the Internal Rate of Return (look into the XIRR function in Excel/Google Sheets). *MFs are not strictly required to pay dividends, but are strongly tax-incentivized to do so, and essentially all do. "Forbes has an article investigating this. Here are the key parts: On line at the bottom of the list of funds there is an entire screen   of grey-faded micro print which includes this telling disclosure: TD Ameritrade receives remuneration from certain ETFs (exchange-traded     funds) that participate in the commission-free ETF program for     shareholder, administrative and/or other services. In other words, TD Ameritrade is now enforcing a pay-to-play for their   so-called commission-free exchange-traded funds. They are willing to   forego their $6.95 trading commission in favor of remuneration   directly from the ETF vendors. Because Vanguard refuses to pay such   money to custodians, they are no longer being allowed to play. and Joseph Giannone, a TD Ameritrade spokesman, was quoted as saying,   ""With any business decision, client needs are paramount, but the   underlying economics of programs can’t be ignored. ... In line with   industry practices, certain providers pay servicing, administrative or   other fees. Vanguard elected not to be a part of the new program."" So basically it sounds like Vanguard, and presumably iShares as well, were unwilling to pay TD Ameritrade to continue offering their ETFs commission-free."