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.
Dividend ETFs
Dividend ETFs let you invest in funds and receive a regular income. Find out how they work and what is the best-performing UK dividend ETF and the top high dividend yield ETF.
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.
What is a dividend ETF?
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.
Best dividend ETFs in the UK
Here are some of the best performing dividend ETFs in the UK according to JustETF:
Best UK dividend ETFs
Table: sorted by 1-year performance based on data from JustETF.com to 2 April 2024
| Icon | Fund | Dividend yield | 1-year performance (to 2 April 2024) | Link to invest |
|---|---|---|---|---|
 | L&G Quality Equity Dividends ESG Exclusions UK UCITS ETF (LDUK) | 5.54% | 13.33% | Invest with InvestEngineCapital at risk |
 | iShares UK Dividend UCITS ETF (IUKD) | 5.58% | 7.10% | Invest with XTBCapital at risk |
 | SPDR S&P UK Dividend Aristocrats UCITS ETF (Dist) (UKDV) | 3.74% | 5.99% | Invest with InvestEngineCapital at risk |
 | WisdomTree UK Equity Income UCITS ETF (WUKD) | 5.43 | 3.86% | Invest with Hargreaves LansdownCapital at risk |
Best high dividend yield ETFs
Table: sorted by 1-year dividend yield based on data from JustETF.com to 2 April 2024
| Icon | Fund | Dividend yield | 1-year performance (to 2 April 2024) | Link to invest |
|---|---|---|---|---|
 | Global X SuperDividend UCITS ETF USD Distributing (SDIP) | 11.27 | 3.59% | Invest with Hargreaves LansdownCapital at risk |
| iShares Emerging Markets Dividend UCITS ETF (SEDY) | 8.43% | 13.87% | Invest with InvestEngineCapital at risk |
 | Xtrackers STOXX Global Select Dividend 100 Swap UCITS ETF 1D (XGSD) | 7.79% | 6.50% | Invest with XTBCapital at risk |
 | Invesco FTSE EM High Dividend Low Volatility UCITS ETF (HDEM) | 6.17% | 5.53% | Invest with Hargreaves LansdownCapital at risk |
How does a dividend ETF work?
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.
How to choose a dividend ETF
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:
- The dividend yield. This is how much the ETF pays out in dividends, relative to its share price. This can only ever be a historic measure, but should give you an indication of the level of income you can expect.
- Historic returns. You can look back on how a fund has performed over 1, 3 or 5 years. While this is not a guide to future returns, it should demonstrate how the fund’s strategy has performed relative to its peers and the type of market environment in which it thrives.
- Expense ratio. Costs can cause a drag on your fund returns. Dividend ETFs tend to be slightly more expensive than standard ETFs, but 0.4–0.6% is standard. Any higher and you could get an actively managed fund for the same price.
- Investing strategy. Does the fund invest in small or larger stocks? Does it invest in a single region or across the globe? Does it invest in specific sectors? It can be worth looking at the top 10 holdings in the fund to see if these are the type of stocks you want in your portfolio.
- Risk. In general, dividend-paying stocks tend to be more mature businesses and therefore are “safer” than other areas. However, there will still be a difference between a strategy targeting, for example, small and mid cap stocks versus larger stocks or specific sectors. It is important to be comfortable with the risk you are taking.
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.
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Example: SPDR S&P Global Dividend Aristocrats UCITS ETF
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%.
Dividend ETFs: accumulating vs distributing ETFs
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 2024/2025 tax year.
Compare accumulating and distributing ETFs in more detail
The effects of compounding over time
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.
Bottom line
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.
Frequently asked questions
Which ETFs pay the highest dividend?
The highest dividend-paying ETFs include the Global X SuperDividend (SDIP) and HSBC MSCI Brazil UCITS ETF USD (HBRL), which have a historic yield of 12.58% and 9.32% 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.
Are dividend ETFs worth it?
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.
How do you know if an ETF pays dividends?
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.
Do ETFs pay monthly dividends?
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.
Which ETF is the best dividend ETF?
Based on performance over the last 5 years, iShares UK Dividend UCITS ETF is the best UK dividend ETF.
What are the different types of dividend ETF?
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.
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