Dividends have proven their worth as part of the total return for shareholders. A well-respected Barclays Equity Gilt Study shows that the long-term return for £100 invested in the UK All-Share Index between 1899 and 2018 is an impressive £2.7 million. However, strip out dividends and that falls dramatically to under £20,000. Reinvesting dividends to benefit from the effects of compounding is one of the most powerful ways to increase returns over time.
Dividends. Some companies choose to share their profits with their shareholders. This is done in the form of dividends.
Yield. The dividend yield is how much a company pays out each year in dividends relative to its stock price, shown as a percentage. It’s worked out by dividing the annual dividends by the current stock price and multiplying the amount by 100.
Exchange traded fund (ETF). An ETF is a type of fund that is traded on a stock exchange.
Compounding. Where your dividends are added to your investments, so they grow with it.
A dividend ETF is an exchange traded fund that tracks the performance of an index or basket of dividend-paying stocks. This is an index such as the FTSE 100 or S&P 500, but screened for those companies paying the highest dividends. The dividends paid out by the ETF can either be rolled up to buy more shares in the ETF or paid out as an income to investors. Dividend ETFs are passively managed, which means the manager will buy and sell only when the index weights change.
Dividend ETFs will track the performance of popular dividend indices. There will be subtle differences between the way these indices work. Some target companies with the highest dividends in the market, while others screen for consistency and longevity of payments. And others focus on companies that have seen the strongest growth in dividends over time. These indices may be weighted by market capitalisation or by the level of dividend and may focus on individual countries or sectors.
When you buy a dividend-focused ETF, you can choose to “accumulate” (reinvest) the income or “distribute” it (pocket the money). If you choose an accumulation strategy, it will be used to buy more shares in the ETF. This can be a good way to harness the power of compounding and grow an investment over time. Either way, the income will be taxed at your marginal rate (the highest rate of tax you pay, perhaps 20%, 40% or 45%). Equally, you may have to pay capital gains tax on a rise in the price of the ETF. If you buy the ETF through an ISA, all income and capital gains are tax-free. Everyone over 18 has a £20,000 annual ISA allowance for the 2023/2024 tax year.
The right dividend ETF for you will depend on your personal investment goals, including whether you need an income from your investments today, the level of income you need and whether you want to prioritise a high or growing income.
Here are the main considerations when buying a dividend ETF:
At a time when prices are rising, investors need to ensure income rises ahead of inflation. Targeting dividend-paying companies can deliver a high and growing income at a time when other sources of income, such as bonds, look anaemic. This is an important tool in protecting your portfolio against higher inflation, as well as harnessing a stable income stream.
The SPDR S&P Global Dividend Aristocrats UCITS ETF is one of the most popular dividend ETFs. £593 million in size, it targets long-term and sustainable dividend growth.
To compile the index, S&P isolates the top 100 stocks from the S&P Global Broad Market Index (BMI) with at least 10 consecutive years of a clear dividend policy with rising or stable dividend payments. These stocks may be found anywhere in the world, across developed and emerging markets.
The stocks in the index are weighted by their dividend yield, with no individual stock forming more than 3% of the portfolio. There are also sector and country limits to ensure that there isn’t excessive focus on specific areas.
Its largest weighting is in the US with Exxon Mobil, AT&T and Chevron among its top 10 holdings. Its current dividend yield is 5.3%.
Here are some of the best dividend UK ETFs according to JustETF:
|Icon||Fund||Dividend yield||1-year performance (to 7 March 2023)||Link to invest|
|iShares UK Dividend UCITS ETF (IUKD)||6.16%||2.71%||Invest with FreetradeCapital at risk|
|L&G Quality Equity Dividends ESG Exclusions UK UCITS ETF (LDUK)||6.02%||5.58%||Invest with IGCapital at risk|
|WisdomTree UK Equity Income UCITS ETF (WUKD)||5.80%||3.73%||Invest with SaxoCapital at risk|
|SPDR S&P UK Dividend Aristocrats UCITS ETF (Dist) (UKDV)||5.80%||-0.88%||Invest with FreetradeCapital at risk|
Compounding is where you reinvest the money received as dividends so that it can also grow in value, as well as bag you more in dividends next time. This means that you could end up owning more shares as you buy additional shares (or fractions of shares) whenever you reinvest.
For example, take General Mills. We looked at the dividend payments from 27 June 2011 to 28 June 2021. If you had invested $100 (about £73) at the start of the period and reinvested all the dividends you received, by the end of the period you would have had approximately $226.57 (around £165).
This is for illustrative purposes so it’s only approximate – it doesn’t consider the ex-dividend dates.
Dividend ETFs can be a cheap and straightforward way to target income-paying companies. This can help you build a high and growing income from your investments that should protect you against inflation. It is worth noting that income-paying companies tend to be larger, mature businesses and tend to have a higher weighting in industries such as oil and gas or tobacco. As such, they may not score as strongly on environmental, social or governance criteria.
The highest dividend-paying ETFs include the Global X SuperDividend and Xtrackers STOXX Global Select Dividend 100 Swap UCITS ETF, which have a historic yield of 14.41% and 10.55% respectively. However, it is worth noting that yields may be high because share prices are low. It can be a sign that the market doesn’t believe that the income will be paid. Investors should approach the highest-yielding ETFs with some caution.
Dividends have been an important component of total returns for investors. Dividend ETFs are a way to secure a long-term inflation-adjusted income from a diversified portfolio of shares. They can often be cheaper than an active fund. When chosen with care, dividend ETFs can be a good option for income-hungry investors.
To understand whether an ETF pays dividends, you need to look at the historic yield. While this only shows the level of income paid out in the past, it is a reliable guide to the portfolio strategy and whether it is likely to pay dividends in future. You can also look at the objectives of an ETF to see whether it targets an income.
Some ETFs pay dividends monthly, but it’s not the norm. Most pay quarterly. If you need an income each month, you will need to find ETFs that explicitly target monthly payments. These are offered by many of the major providers, including State Street Global Advisors, Vanguard Group and BlackRock.
There are many categories of dividend ETFs: the funds may take a global approach or they may target dividend-paying companies in different regions. Other types of dividend ETFs will focus on sectors that offer high yields, such as real estate (REITs).
All investing should be regarded as longer term. The value of your investments can go up and down, and you may get back less than you invest. Past performance is no guarantee of future results. If you’re not sure which investments are right for you, please seek out a financial adviser. Capital at risk.
Now in their third year, these awards recognise the credit, loans, mortgage and BNPL providers displaying the best innovations in their field.
The winners of the Finder Lending Innovation Awards 2023 have been announced, find out who won across seven categories here.
Find out the winners and highly commended brands in the Finder Lending Innovation Awards 2023. The best lending innovation in the UK!
This guide provides step-by-step instructions on how to buy Sui, lists some exchanges where you can get it and provides daily price data on (SUI).
This guide provides step-by-step instructions on how to buy Pepe, lists some exchanges where you can get it and provides daily price data on (PEPE).
This guide provides step-by-step instructions on how to buy Arbitrum, lists some exchanges where you can get it and provides daily price data on (ARB).
This guide provides step-by-step instructions on how to buy SSV Network, lists some exchanges where you can get it and provides daily price data on (SSV).
This guide provides step-by-step instructions on how to buy USDD, lists some exchanges where you can get it and provides daily price data on (USDD).
This guide provides step-by-step instructions on how to buy Blur, lists some exchanges where you can get it and provides daily price data on (BLUR).
This guide provides step-by-step instructions on how to buy FLOKI Inu, lists some exchanges where you can get it and provides daily price data on (FLOKI).
finder.com is an independent comparison platform and information service that aims to provide you with the tools you need to make better decisions. While we are independent, the offers that appear on this site are from companies from which finder.com receives compensation. We may receive compensation from our partners for placement of their products or services. We may also receive compensation if you click on certain links posted on our site. While compensation arrangements may affect the order, position or placement of product information, it doesn't influence our assessment of those products. Please don't interpret the order in which products appear on our Site as any endorsement or recommendation from us. finder.com compares a wide range of products, providers and services but we don't provide information on all available products, providers or services. Please appreciate that there may be other options available to you than the products, providers or services covered by our service.