ETFs are an investment category that hasn’t been around as long as many out there. However, that doesn’t mean they aren’t worth a look. Much like stocks and mutual funds, there are a whole host of ETFs out there to choose from. Every ETF is designed for a specific purpose or goal, in a similar way to mutual funds (but different).
Whether you’re looking for income or growth, there are plenty of options to choose from. Check out some of these best dividend ETFs, and everything that you should know about them.
What Are ETFs?
ETF stands for exchange traded funds. If you are at all familiar with mutual funds, these are very similar as far as how they work. The biggest difference is the holdings inside of them and how they are traded. Most ETFs track a specific index and that is what their performance is measured against.
ETFs are traded on stock exchanges and treated similarly to stocks, which is what sets them apart from mutual funds. ETFs can hold funds inside, as well as things like stocks, commodities, and other assets.
Buying and selling ETFs works the same way as buying and selling stock, but they are not actually stocks. This type of asset has only been around for about 30 years, and it continues to gain popularity.
The 10 Best Dividend ETFs
If you’re building a portfolio that you want to generate income, you’re going to focus on assets that pay dividends. Some people will use bonds, dividend stocks, mutual funds, and other income-producing assets. ETFs that generate dividends and income can also be a great choice.
But the key is that not every ETF is designed for income, just like other types of assets. Some will be designed for growth and may not really produce dividends. We’ve searched the market to find the top dividend ETFs on the UK markets.
Take a look at these picks.
1. SPDR S&P UK Dividend Aristocrats UCITS ETF
The SPDR ETFs are some of the most popular choices on the market. The ongoing charges are very affordable and the yield is steady. This isn’t necessarily the highest yield, but it’s an all-around quality ETF that has been dependable and steady through the years.
On average, the dividend yield in the past year has hung out right around 4-5%, with only mild fluctuation. The price of the shares is pretty inexpensive, coming in at less than £10 per share most of the time. The ongoing charges are only .3%, which is quite reasonable.
This SPDR investment is targeted to the UK markets, with exposure that is only in the UK markets.
There is little to no global exposure. They invest in some of the largest, highest yielding companies to help pull in high dividends that then benefits anyone who holds the ETF.
2. iShares UK Dividend UCITS ETF
iShares is another top choice among ETFs that has been really popular from the beginning. The annual charge is slightly higher, but the dividend yield is also one of the trending highest annual yields. If you’re looking for high dividends that are reliable from year to year, this ETF so far has provided that.
Much like SPDR shares, these are affordable as well, ranking into about the same price range. You can find this iShares ETF on the London Stock Exchange, and it’s fairly easy to get ahold of. The dividend yield is currently 6.5% annualized, with an ongoing charge of only about .4%.
Since it’s on a primary exchange, it’s typically pretty easy to find on any trading platform that allows access to the London exchange. This year was a bit of a roller coaster in terms of share prices, but overall, the dividend yield has remained pretty steady.
3. L&G Quality Equity Dividends ESG Exclusions UK UCITS ETF
Legal & General has an ETF that just might pique your interest in terms of dividends. They are known for high yields and low fees, making them an advantageous choice that many people show an interest in. It’s not the largest fund out there, but still a good size with £38 million on board.
This ETF measures against the FTSE All Share ex IT ex CW ex TC ex REITS dividend growth with quality net tax index. While that index might be a mouthful, it’s proven to be a good index for this particular fund.
It’s a very small fund that has only 37 holdings. Every holding is geared towards producing high levels of income, without high levels of risk. The goal is to distribute income consistently, and they’ve done just that. The dividend yield is right around 5.45%, with an ongoing charge of only .25%.
4. Vanguard FTSE All World High Dividend Yield UCITS ETF
Vanguard is a company that has long been known for having low fees and reliable fund outcomes. Their all world high dividend ETF has a minimal ongoing charge of only .29%. They certainly measure up against the competitors in that regard.
Something else that stands out here in terms of the fund is how huge it is. This fund is more than £2.5 billion currently, which is substantial. They benchmark against the FTSE all world high dividend yield index, and they’re doing alright in terms of dividend yields.
This ETF from Vanguard uses the index to invest by choosing options that are similar to the sample, and then building it up from there. While the number of holdings can fluctuate, the last review showed more than 1,700 stocks in the holdings.
The dividend yield isn’t as high as some of these, but is still at a great level and stays consistent. The current annual yield is 4.13%.
5. Wisdom Tree UK Equity Income UCITS ETF
Wisdom Tree is a lesser known company, but no less reliable. They may not be a big name like SPDR, Vanguard, and iShares, but they’ve got this great fund that has high dividend yields consistently. This ETF is comprised of all UK stocks that have high dividend yields, and it’s been a hit.
The Wisdom Tree ETF also has pretty low ongoing charges, that are only .29%. The annualized dividend yield is 6.1%, which is one of the highest on this list, right up there with some of our top contenders.
If you check out the price history, you will see some volatility, much like other funds out there. They’ve not remained unaffected by the markets of late. However, the dividend yield has remained steady. Plus, that means that you can get into this ETF for low costs, possible under £5.
6. First Trust United Kingdom Alphadex Fund
This next one comes from another smaller company, and while they have a slightly higher ongoing charge, their customer return and dividend yield is substantial, making them a great choice to consider.
This UK focused ETF invests in UK markets, but narrows down who they select with a clear strategy.
They monitor stocks and apply grades to them based on both dividends and growth, giving a little bit of twist to the concept. This means that you see growth return, as well as paid dividends, and it’s a nice mix.
The fund holds only about 75 stocks within it. These stocks are weighted based on the best yields and growth combined, which helps to determine allocations. The ongoing charge is .80%, which is high but when you look at the growth and dividend yield, it seems like it’s worth the cost.
7. Franklin FTSE UK ETF
This Franklin fund shows a high total return, which includes both dividends and growth. However, what really strikes us about this ETF is how low the costs are for ongoing charges. It is one of the lowest out there, with only .09% as the expense.
The positions in this Franklin ETF are primarily made up of UK companies that fall into mid-cap and large cap categories. Of course, they have their own system of weighting the individual holdings to determine the allocation within the fund.
This UK ETF has only been around for a few years, so it’s fairly small. However, the annualized return totaled nearly 14% in the past year. Remember that this number includes growth and dividend, but it’s still a great return level that just might be what you’re looking for.
8. Alerian MLP ETF
This one is a little bit different, but it’s a really hot item in recent years. It’s considered one of the highest yielding ETFs in it sector. This ETF falls into the energy sector, which makes some people uncomfortable. However, if the yields are what you are after, this sector has been known to deliver.
The market continues to become popular here, and this ETF was designed to deliver dividends. The ongoing charges are a bit high at .87%, but when you consider the average 5-year return that has exceeded 16%, you really can’t complain too much about that fee. It’s well offset by the returns.
This ETF generated dividend income of almost 8% throughout 2022, making it a great choice for those high dividends. You just have to be comfortable being invested into the energy industry, which is totally up to you.
9. Victor Shares US Large Cap High Dividend Volatility WTD ETF
This next one isn’t as high in terms of dividend payouts, but it’s another fund that is consistent and reliable. The Victor Shares ETF focuses on the large cap market, and their dividend yield holds right around the 3% marker most of the time.
Their ongoing charges are pretty low, which means you aren’t paying astronomical rates to get that dividend yield. This charge is only .35%, which falls much lower than some of the numbers we’ve seen here.
Victor Shares isn’t as widely known as some competitors, and their ETF has some volatility to it. However, the yields remain steadfast even with the ups and downs of their share prices.
10. Invesco KBW High Dividend Yield Financial ETF
Finally, we take a look at a financial sector ETF with relatively high yields. They also have a relatively high expense ratio, which is what really gets them in comparison to the competition. That being said, when you consider the expense ratio and the total yields, you find yourself right in the same range as many of the others we have shared here.
This Invesco ETF is more of a global fund, and they invest heavily in US markets.
Their dividend yield has been close to 10% in 2022, but their expense ratio is also high at 2.59%. Dividends range right around 8%, so even with the expense factor in play, you’re looking at around 6% yields.
If you’re investing with income in mind, the Invesco ETF is a great choice to do so, just be aware of that expense cost when you’re dreaming up your income totals.
Top Things to Know About Dividend ETFs
When you’re looking at dividend ETFs, there are some basic details to be aware of. There are some variables from fund to fund, and that might just affect your choices in the long run.
Sector Formats
First of all, you can find dividend yields that fall into different sectors. Be sure to check this out and choose sectors you are comfortable with. For example, above you see financial and energy sectors, among others.
It’s important to do your research and understand the sector.
While a dividend payout might be high in one year, it’s not always guaranteed. Many of the ETFs we shared above are UK-based, but not all of them. The sectors they are based on might affect your market exposure.
Passive Vs. Active Management
When it comes to ETFs, what sets them apart from stocks is the fact that they are managed. This is comparable to mutual funds. That being said, the management could be either active or passive, which also might make a difference to you.
Whether a fund is active or passive relates to how closely it is managed, but it will also affect the ongoing charges of the fun. Actively managed funds often have slightly higher fees. However, they are more closely monitored and adjusted. That is what the higher fees accommodate.
In contract, passive management just has routine reviews and rebalances, but isn’t necessarily monitored actively. Since they are monitored less, they tend to have lower ongoing charges and fees for you to worry about.
One is not necessarily better than the other, but it’s something to be familiar with.
ETF Holdings
In any one ETF, there will be multiple different holdings inside. One ETF might only have 30 different stocks, while another might have 2,000 stocks in it. Some of this will depend on the index the ETF is tracking, as well as the sector or market that they are in.
In some cases, the more holdings within, the more protected you are from significant changes to any one holding. However, you also get a smaller piece of every holding in the ETF. You probably want to stay away from ETFs that have fewer than 30 holdings, at least for income purposes.
However, being invested in an ETF with 2,000 holdings is not a bad thing. Again, it really just depends on the focus of the ETF.
Dividends Are Not Guaranteed
Finally, it’s important to be aware that while you find an ETF that pays 6% dividends right now, that isn’t guaranteed. The stocks within every ETF can be volatile or be affected by the economy. If a large portion of those stocks decides to reduce or withhold dividends, this will directly affect your income payouts.
In most cases, dividends will not be significantly adjusted unless there is some major underlying reason. However, it’s always possible that you could find yourself receiving no dividend, or a heavily reduced dividend in some cases.
When you’re doing your research, take the time to look back at the historical dividend payout. This will tell you if it’s been a steady factor with that ETF. That being said, that detail doesn’t always guarantee dividends will continue. It’s simply an indicator they have been steadfast prior to now.
Be aware of what is going on with your ETF holdings and pay attention to the markets.
Any type of shock event, or economical struggle, could cause a company to decide dividends are the first things to go. It’s never a guarantee, and that’s the thing to keep in mind.
Final Thoughts
If you’re looking for the best dividend ETFs, you will find some really great options in this guide. The best fit for you will depend on your portfolio needs, as well as any sector preferences you might have.
While dividends are never guaranteed, these choices show historical promising dividends. Don’t forget to keep the ongoing fees and charges in mind as you peruse your choices. Remember that dividends are never guaranteed, but neither is anything else in the world of investing. It’s your best guess based on research and background.
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