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Abu Dhabi, UAEFriday 14 December 2018

10 ETFS that pay generous dividend income

These passive tracking funds combine a high yield with a low annual charge allowing investors to boost their returns

Illustration by Alvaro Sanmarti
Illustration by Alvaro Sanmarti

Investing is a numbers game, and two of the most important figures to check are the dividend yield and investment fund charge.

If you can combine a high annual dividend yield with a low annual charge, you can turbo-charge your returns.

A number of low-cost exchange traded funds (ETFs) can help in this way, by offering generous dividend yields and rock bottom charges, with a total expense ratio (TER) ranging from as little as 0.07 per cent to 0.75 per cent on most funds.

ETFs are passive index tracking funds that can be bought and sold easily like shares, at minimal cost.

They offer one of the simplest ways to get rich from stocks and shares, because you do not need any stock picking ability.

Simply choose a balanced spread of funds, covering different sectors, markets and regions, and resist the temptation to fiddle with the formula or raid your money to fund yet another lavish holiday.

Vijay Valecha, chief market analyst at Century Financial Brokers in Dubai, says ETFs are a great option for ordinary investors looking to build their wealth due to their low charges and simplicity.

“Dividend-paying ETFs are a prime attraction since they offer a low-cost way for tapping income from a diverse spread of hundreds or thousands of global stocks and bonds covering every sector you can imagine.”

Dividend-paying ETFs are not just for income, they also offer growth if you reinvest your dividends. You may still want to balance them with funds focusing on capital growth. Here are 10 attractive high yielders to consider: (HERE FOR THE NEW INVESTOR, can you have a quick line explaining the titles - ie what the name of the ETF is and then what the letters in brackets refer to)

Global X SuperDividend US ETF (DIV)

This ETF follows the fortunes of the Indxx SuperDividend US Low Volatility Index and invests in 50 of the highest dividend yielding stocks on the US market.

It currently yields a generous 4.85 per cent, with annual charges of 0.45 per cent, making it ideal for income seekers who want exposure to dividend stocks in the world's largest economy. Remember that yields are not guaranteed and can be cut or scrapped if a company runs into trouble.

iShares JP Morgan USD Emerging Markets Bond ETF (EMB)

Emerging markets have outperformed the developing world in the past two years and many investors are also waking up to emerging market bonds, which offer higher yields than you will get on, say, US government bonds, albeit with greater volatility and risk.

This ETF currently yields 5.55 per cent a year from investing in US dollar-denominated government bonds issued by countries such as Ecuador, Russia, Poland, Peru, Egypt and Colombia, with charges of 0.40 per cent a year.

iShares Euro Dividend UCITS ETF (IDVY)

For those wanting exposure to Europe, this ETF tracks the performance of an index of 30 eurozone stocks with generous dividend yields.

The eurozone may be in turmoil due to fears over Italy's political and economic future, but many companies are growing strongly, raising earnings and boosting dividend payouts. This ETF gives you exposure to their fortunes, with a current yield of 4.28 per cent, and TER of 0.40 per cent a year.

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Nuveen Preferred & Income Securities Fund (JPS)

If you want a really high income, this fund yields 7.48 per cent a year. It aims to offer high income while limiting the risks with half its holdings invested in securities rated investment grade, while focusing on highly regulated sectors. Remember, higher income invariably means higher risk, and the fund also uses leverage, borrowing money in the hope of generating higher returns. It is relatively expensive for an ETF, with annual charges totalling 1.43 per cent.

Oliver Smith, portfolio manager at online trading platform IG, which has offices in Dubai, notes that dividend-focused ETFs tend to avoid technology stocks, which have performed exceptionally well over the past five years and now form an increasingly sizeable amount of large cap indices. “The tech sector now makes up more than 24 per cent of the S&P 500, but yields just 1.2 per cent, so you will get little exposure from a dividend fund.”

Safer, lower risk dividend stocks are likely to swing back into fashion, but are not without their dangers, he warns.

iShares Core FTSE 100 (ISF LN)

The FTSE 100 continues to offer the highest yield of the major developed markets and with companies generating three quarters of their earnings overseas, you get global exposure too.

The income is currently 3.87 per cent, with low charges of just 0.07 per cent. Investors should treat the UK with some caution due to the concentration risk, with HSBC, BP and Royal Dutch Shell accounting for 24 per cent of market cap.

iShares EM Dividend (SEDY)

Those happy to take on higher-risk might consider investing in emerging market stocks, many of which pay income as well. This ETF offers a yield of 4.2 per cent with charges of 0.65 per cent, by investing in 100 emerging market companies that have paid healthy dividends for at least three years.

BMO Barclays Global High Yield GBP Hedged (ZHYG LN)

Investors who want exposure to bonds should consider this ETF, which invests in a global spread of bonds, with heavy exposure to the US.

The high yield bond market is riskier than investment-grade bonds, but offers higher potential income. This ETF is also currency hedged and yields 4.84 per cent, with charges of 0.35 per cent.

Sam Instone, director of UAE-based financial advisers AES Investments, says as well as looking at the headline yield, you also need to look at the underlying investments within an ETF. "Otherwise you could take on more risk than you are comfortable with.”

For example, the UK's FTSE 100 contains some of the most consistent dividend payers but with heavy weighting towards oil majors such as BP and Royal Dutch Shell, and mining giants such as BHP Billiton and Rio Tinto. “A high-yielding equity ETF may have a large exposure to these sectors, which can be more volatile than the overall market.”

Mr Instone says the next two ETFs (listed below) give you a far broader exposure to reduce risk.

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iShares USD Corporate Bond ETF (LQDE LN)

This fund seeks to track the performance of an index composed of US dollar-denominated investment grade corporate bonds across a range of sectors including industrials, utilities and financial companies.

This makes it lower risk but it offers a generous yield of 3.40 per cent a deal with a TER of just 0.20 per cent.

iShares UK Equity Index fund (BCUKEXA)

You can generate capital growth and dividend income by closely tracking the performance of the FTSE All Share Index, which offers a wider spread of shares than the FTSE 100. It currently yields 2.81 per cent, with rock bottom charges of just 0.01 per cent.

Tom Anderson, senior investment manager at wealth advisers Killik, who has clients in Dubai, says one of the benefits of dividend investing is that successful companies aim to increase their payouts year after year, which means you can lock into a rising income.

SPDR Global Dividend Aristocrats UCITS ETF (GBDV)

This popular ETF tracks the performance of the highest-yielding companies within the S&P Global Broad Market Index, that have either held or increased their dividends for at least 10 years. It currently yields 3.5 per cent with annual charges totalling 0.45 per cent.

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How to maximise your returns

If you combine a high dividend with a low annual charge, you can generate steady returns year after year, offsetting stock market volatility.

The key is to reinvest dividends back into your portfolio for growth, rather than banking the income. This way you buy more stock, which generates more dividends, which buys more stock, and so on.

Over lengthy periods this compounding effect can double your returns, according to new research from Fidelity.

If you had invested £100 (Dh491) a month in the UK’s FTSE All Share Index over the past 10 years and reinvested all of your dividends, your portfolio would be worth £19,382. However, if you had taken the dividends as income you would have just £15,837, around £3,500 less.

Dividend investing really proves its worth over longer periods. After 30 years your portfolio would be worth £140,585 with dividends invested, twice as much as the £70,923 you would have if you had withdrawn and spent the dividends.

Fidelity investment director Tom Stevenson said the earlier you start, the better. “For compounding to supercharge your returns it requires two simple ingredients: time and the regular reinvestment of returns.”

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ETFS explained

The five largest ETF providers are BlackRock’s iShares, Vanguard, State Street Global Advisers, Deutsche Bank AWM X-Trackers and Invesco PowerShares. ETF names can often seem technical and a little off-putting. They typically include the provider names such as iShares, but not always, plus a short description of the index they are benchmarking. This is sometimes shortened, for example iShares EM Dividend ETF tracks a balanced spread of emerging market stocks and shares, while SPDR Global Dividend Aristocrats UCITS ETF, part of the SPDR range of funds, follows a spread of global companies that pay high dividends. Some funds include the acronym UCITS, which is short for Undertakings in Collective Investments in Transferable Securities and means funds that are regulated to be sold across the EU and beyond. The letters in brackets are often called the ticker, and make it easier to identify the right fund online, and on your share dealing websites. Some ETFs may have more than one ticker, which vary according to the jurisdiction they are sold in, or the underlying currency.