Index ETF share cost and annual income

There are two different kinds of ETFs, and they handle dividends differently. Distributing ETFs pay the dividends to the ETF investors, while accumulating ETFs reinvest them which results in an increase in the value of the ETF shares.

While it’s true that ETF prices are entirely dependent on supply and demand, in practice they will always track the market value of the underlying assets very closely, because arbitrageurs are always looking for asset price discrepancies to exploit, and will buy if the market price drops below the asset value, and sell if it rises above.

Stock dividends are never paid directly to ETF holders. The ETF will collect the dividends in cash and either reinvest them in the stocks necessary to best track the target allocation of stocks (e.g. an index for an index ETF), or distribute some or all of that cash periodically to investors. They are not required to pass on all dividends or to pass them on as they are received - it's just a decision that the ETF manager makes as to how to deal with cash funds. Most equity ETF pay an annual dividend near the end of the year. Bond ETFs typically pay monthly dividends (since the goal is more often income than growth)

Note also that dividends (for stocks as well as ETFs) have zero effect from a wealth standpoint. If an ETF pays a $1 per unit dividend, then after the payout it has $1 per unit fewer assets and thus the price per unit goes down by $1. So if you own $100 of an ETF before the dividend, after the dividend you'll have $99 of the ETF and $1 in cash. If you choose to reinvest the dividend, you'll still have $100 of the ETF, just in a different proportion of units and price.