Sure, ETFs can give you low-cost, broad access to market indexes, such as the S&P 500 or the FTSE 100 –but they can also give you exposure to certain kinds of stocks. If you’re looking for income, for example, ETFs can give you access to a group of shares with dividend yields. By selecting the income share class, often marked “dis” for distributing, you can have dividends paid right into your investment account, rather than reinvested. Here’s a look at some of the most eye-catching funds, and the things you need to know if you’re thinking about diving in.
Here are a few of the eye-catching ones.
Using data provider Morningstar, I found eight ETFs that yield more than 5% without using leverage. I found another six that yield more than 4%. For reference, the FTSE 100 index – one of the highest-yielding indexes in the world,thanks to its concentration in cash-rich resources, tobacco, and financial companies – currently yields just 3.8%.
The biggest-yielding ETFs use rules to select only high-income shares. The top is the Xtrackers Stoxx Global Div100 Swp ETF 1D GBP with a 7.6% yield, according to Morningstar. This ETF, which charges 0.5% in annual fees, selects the highest-yielding 100 global companies from developed markets. It owns firms ranging from the UK’s HSBC Holdings and Legal & General Group to miner Yancoal Australia and developer Henderson Land Development Co.
Also yielding more than 7% is the iShares EM Dividend ETF USD Dist, which for a relatively steep fee of 0.65% will allow you to own the highest-yielding emerging market shares, such as Petroleo Brasileiro, Vedanta, and Bank Of China. There’s also the iShares Asia Pacific Div ETF and WisdomTree Emrgng Mkts Equity Income ETF, which yield 5.4% and 5.1%, respectively, by investing in the highest-yielding shares from their respective markets.
The iShares UK Dividend ETF GBP Dist takes a similar approach: investing in the 50 highest-yielding UK shares, including HSBC, Imperial Brands, Vodafone Group, and Rio Tinto Registered Shares. The strategy has one-third invested in financial firms, like banks and insurers.
While most of the ETFs on the list focus on high dividends exclusively, some own shares that pay reliable and growing dividends. This seeks to avoid the pitfall of owning shares that have fallen a lot in value because the company is struggling –which pushes up the dividend yield since that’s calculated by taking the past 12 months of dividends per share and dividing by the share price (and then multiplying by 100). It’s important to remember that a falling share price may suggest that future dividends will be cut. It’s also important to bear in mind that high yields don’t mean market-beating returns from a total return perspective, i.e. when both capital and income are combined.
A few more: the SPDR S&P EmMks Dividend Aristocrats ETF yields 4.4% and owns only emerging market stocks that have increased or maintained dividends for five consecutive years or longer. The Xtrackers Euro Stoxx Quality Dividend ETF (DXSA) and Franklin European Quality Div UCITS ETF yield around 5% and own companies with high and persistent dividends in Europe. And the Invesco EURO STOXX Hi Div Low VolETF GBP is another interesting pick if you’re looking for stable returns. It owns 75 European shares ranked by their 12-month historical dividend yield and their 12-month historical volatility (starting with the least volatile).
Here’s how to decide whether they’re worth it.
It’s important to understand why the yields are high. Dividend yields are a product of the dividend a company pays, but also the share price. So a high yield could be the result of a struggling industry or sector rather than a healthy company returning lots of cash to shareholders.
I mean, look, total returns – which include capital gains and reinvested dividends over five years – have been pretty disappointing for some of these ETFs. The iShares EM Dividend UCITS ETF has been roughly flat over five years, so has the iShares Euro Dividend Ucits ETF. The iShares Asia Pacific Dividend, meanwhile, is up just 7% over that whole period.
Still, high dividend yields can help smooth returns for investors, as they’re likely to get a set amount of income per year, which could rise with inflation if companies make more money.
Strong performers, on a total return basis over five years, include the Franklin European Quality Dividend UCITS ETF (up 40%), the WisdomTree Europe SmallCap Div UCITS ETF (up 35%) and the iShares UK Dividend Ucits ETF (up 32%). These trackers show that high dividends don’t always come at the cost of capital returns.
Alex Watts, investment data analyst at interactive investor, also makes the point that a high yield may not necessarily be sustained. So when you’re seeking out high-yielding firms, make sure you’re looking for sufficiently strong balance sheets that can sustain (or expand) those payments over time.
However, Watts also stresses the long-term power of dividend reinvesting. After all, a consistent dividend can provide a steady income return –which could potentially grow over time – on top of any returns from a rise in a company’s share price. And over time, steady dividends can provide a cushioning effect when markets slide.
Watts is a fan of two lower-yielding ETFs.
The first, yielding around 4%, is the SPDR® S&P Global Div Aristocrats ETF GBP. It aims to track the performance of high-dividend companies around the world. But they have to have a record of maintaining or growing their dividends over the past ten consecutive years too, while having a positive return on equity and cash flow. Rather than weighting by the company’s size, the stocks are weighted by the size of the dividend, which leads to a markedly different composition from that of a conventional global index.
For example, the fund holds a heavier-than-benchmark weighting in utilities (26.6%), financials (25.6%), and real estate (11%), while going lighter-than-benchmark on tech (2.4%) and healthcare (3.1%). And it’s overall more skewed toward mid-cap companies –with those firms occupying about 40% of the portfolio, or about double what you’d see in the conventional MSCI World index. That big emphasis on mid-cap and value firms proved a bit of a drag last year and so far this year, but its defensive stocks paid off in 2022.
The fund offers plenty of diversification with around 100 holdings. Its yearly fee of 0.45% is in line with its peers.
Watts’s second pick is broader and less stylistically differentiated –the Vanguard FTSE AllWld HiDivYld ETF USDAcc GBP. It yields just over 3%, and holds roughly 1,880 large and mid-cap stocks from the FTSE All-World index, but only includes shares with higher-than-average dividend yields. The fund excludes companies that are due to not pay a dividend over the coming 12 months and ranks the remaining companies by their dividend yields.
And with its yearly fee of just 0.29%, it’s one of the cheapest global equity income ETFs.
