Investing guides
What are high dividend ETFs?
Discover how to invest in high dividend Exchange-Traded Funds (ETFs).
Please remember, investment value can go up or down and you could get back less than you invest. The value of international investments may be affected by currency fluctuations which might reduce their value in sterling.
High dividend ETFs are investment funds that focus on stocks that have high dividend yields.
They can provide investors with a steady income stream.
In general, ETFs suit investors who want to save time and not manage a portfolio of individual stocks.
Why invest in high dividend ETFs?
Investing in high dividend ETFs offers investors several benefits:
- They can increase your cash flow by providing a steady stream of income.
- The extra income is generally paid quarterly, but some ETFs may offer monthly distributions.
- If you are retired, the income can be used to top up a pension.
- If you don’t need the income, you can reinvest the dividends into your existing holdings.
What makes an ETF a high dividend ETF?
A yield greater than 4% could be considered a high dividend ETF. As of June 2024, this is ahead of the UK market (FTSE All Share) yield of around 3.5%, and the yield on global shares (MSCI World index) of around 1.5%.
Dividend yields quoted on a fund’s factsheet are backward looking, meaning that they calculate the income paid out over the past 12 months as a percentage of the current price of the ETF. While a good guide for the yield of a portfolio, future dividends may vary, and a rising price of an ETF can reduce its yield if there is not an equal increase in dividends paid.
High dividend ETFs could focus on companies in a set market that pay higher than average dividends, or they may track a market that has a high average dividend.
Other income-focussed equity ETFs may focus on “dividend growers” – companies which have consistently increased their annual payouts. While yields here may be lower, the reliability of the dividends may be greater, as these companies prioritise increasing payouts to shareholders.
Best High Dividend ETFs
Vanguard FTSE AllWld HiDivYld ETF $Dis GBP (LSE:VHYL) is one high dividend ETF that features in ii’s Super 60 list of fund ideas. It yields 3.05% by owning high-yielding mid and large-sized companies from around the world. Risk is spread across 2,000 stocks and the ongoing charges figure (OCF) is 0.29%
Other popular high-yielding ETFs include SPDR® S&P Global Div Aristocrats ETF (LSE:GLDV), which owns global shares that have increased their dividend annually for at least 10 years. It yields just over 4% and owns 99 companies, charging annual fees of 0.45%.
iShares Core FTSE 100 ETF GBP Dist (LSE:ISF) tracks the high-yielding FTSE 100 index, paying out nearly 4% annually, with distributions to investors every three months. It costs 0.07% in annual fees.
Fidelity Global Qual Inc ETF Inc GBP (LSE:FGQD) yields 2.5%, paid quarterly. It owns 227 “financially robust” companies that should be able to continue paying dividends to shareholders. It costs 0.4%.
Other high-yielding ETFs include:
- iShares EM Dividend ETF USD Dist GBP (LSE:SEDY) (7.36% yield)
- iShares Asia Pacific Div ETF USD Dist GBP (LSE:IAPD) (5.37% yield)
- iShares UK Dividend ETF GBP Dist (LSE:IUKD) (5.21% yield)
- WisdomTree Europe Equity Income UCIT ETF GBP (LSE:EEI) (5.37% yield)
Pros and cons of high dividend ETFs
Pros
- It’s easy to diversify - ETFs often invest across a broad selection of sectors and companies.
- You get a potentially regular income stream if you get consistent payouts.
- ETFs are managed by professional fund managers, so you don’t have to be an expert.
- ETFs can offer dividends even when company earnings are down, making them a reliable source of income.
- ETFs are generally less expensive than mutual funds.
Cons
- There is no guarantee of future dividend payments – they can change or stop.
- If the stock price is high, that could offset the yield and reduce overall returns.
- Dividends are subject to taxes unless they are unless in a tax-efficient account such as an ISA.
How can I invest in high dividend ETFs with ii?
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