For investors looking to create a steady income stream for their portfolio, dividend ETFs can be a helpful tool to make use of in the stock market. But creating and managing a portfolio with suitable dividend stocks can be time-consuming and expensive.
Fortunately, dividend exchange-traded funds (ETFs) can be a suitable alternative for the time-limited investor, offering a method for income investing across a diversified selection of stocks.
Also consider: The best ETF platforms for UK investors
5 of the best UK dividend ETFs to buy December 2024
Remember: this list is not a personal recommendation and does not constitute financial advice. Do not buy these investments solely based on what you read in this article. These picks do not constitute personal recommendations or financial advice.
- Fund size: £742 million
- Annual charge: 0.4%
- Dividend Yield: 6.5%
- Best for: Anyone who would like exposure to dividend-paying stocks among the UK’s largest companies.
Key points
Listed on the London Stock Exchange, this fund is a UK dividend ETF that tracks the performance of an index made up of the top 50 dividend-yielding stocks in the UK.
Financial companies are the predominant asset class in the fund, as that’s what makes up most of the underlying index. This is closely followed by materials and consumer staples.
The fund has had a tumultuous year, with a high for each fund unit of £8.08 in February 2022. However, this has since fluctuated throughout the year, reaching a year low of £6.13 in October 2022.
From the low in October, the fund’s unit prices are starting to rise again, opening at £6.59 as of 3 November.
Source: Forbes
Best range of ETFs at
Whenever you invest, your capital is at risk. Minimum investment £100, T&Cs apply.
- Fund size: £38 million
- Annual charge: 0.25%
- Dividend Yield: 5.45%
- Best for: Investors looking to align their investments with their values, as this fund takes an approach to screening and barring certain companies. However, it does invest in tobacco companies, so it may not be suitable for investors with ethical viewpoints against the tobacco industry.
Key points
This fund invests in 37 stocks as of October 2022 and aims to provide an income from UK shares with quality screens and responsible exclusions.
Its investment strategy seeks to invest in companies that can distribute income consistently and can sustain their dividend payouts.
The fund aims to screen out any form of stocks that have a poor income statement, and poor ESG (environmental, social, and governance) characteristics.
However, this has led to one of the fund’s biggest holdings being that of British American Tobacco. This happens when third-party ESG ratings are used, allowing tobacco companies to score highly in the sustainability ratings, even though many people believe they should not be able to pass the ESG criteria.
So, if you’re investing for ethical reasons, make sure you check that the underlying holdings align with your values first.
This fund has seen a downtrend in the cost of fund units throughout 2022. It started the year in January offering units at £10.33, falling to a year-low £8.18 at the end of September 2022. From that low, the cost of each unit is starting to rise, opening at £8.64 on 3 November.
Source: Forbes
Best range of ETFs at
Whenever you invest, your capital is at risk. Minimum investment £100, T&Cs apply.
- Fund size: £135 million
- Annual charge: 0.3%
- Dividend Yield: 4.72%
- Best for: Retail investors interested in exposure to the UK market only.
Key points
This is a fund that tracks the performance of the highest dividend-paying UK companies, currently holding 39 stocks as of November 2022. Only the largest, higher-yielding companies are found in this fund’s benchmark index.
The largest holdings within this fund come from financials, which account for 24% of the fund, followed by property at 21%.
Top holdings for this fund include large-sized companies such as IG Group Holdings and Hargreaves Lansdown.
Up until September 2022, this fund had a steady fund unit price with highs of £11.35 in August 2022. However, since September, prices have dropped dramatically to a low of £8.96.
Even so, units are starting to rise again and, as of 3 November 2022, opened at £9.52.
Source: Forbes
Best range of ETFs at
Whenever you invest, your capital is at risk. Minimum investment £100, T&Cs apply.
- Fund size: £2.54 billion
- Annual charge: 0.29%
- Dividend Yield: 4.13%
- Best for: Investors wanting a well-diversified portfolio of stocks from across the world, including both developed and emerging markets.
Key points
One of the global dividend ETFs available in the UK, Vanguard’s FTSE All-World High Dividend Yield ETF is well worth considering.
Its benchmark index, the FTSE All-World High Dividend Yield Index, provides this fund with wide exposure to the highest dividend stocks in both developed and emerging markets, which usually pay dividends that are generally higher than average.
As of September 2022, this fund held 1,781 stocks, making it one of the largest funds to invest in on my list. As its holdings are found throughout the world, this fund offers investors the ability to develop a highly diverse international portfolio.
This fund has seen a lot of fluctuations in unit price throughout the year. From a high in early June 2022 of £50.10, it saw a large decrease to its lowest price of the year by the end of the month, dropping to £45.44. As of 3 November 2022, units are rising in value again, opening at £48.10.
Source: Fidelity
Best range of ETFs at
Whenever you invest, your capital is at risk. Minimum investment £100, T&Cs apply.
- Fund size: £7.81 million
- Annual charge: 0.29%
- Dividend Yield: 6.1%
- Best for: Investors wanting to invest in mainly UK-based companies that provide the highest dividend yields.
Key points
This fund follows the WisdomTree UK Equity Income index, a list that includes UK stocks with the highest dividend yields.
It offers diversified exposure to a range of UK-based equities which crucially must meet WisdomTrees’ ESG criteria.
Like many other funds on my list, this ETF has had a difficult year. Year-highs of £4.75 in January have been followed by a gentle decline in values, reaching a low of £3.63 in October.
Fortunately, since then, unit values have started to rise again and, as of 3 November 2022, units opened at £3.87.
Source: Financial Times
Best range of ETFs at
Whenever you invest, your capital is at risk. Minimum investment £100, T&Cs apply.
Please note
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
What are dividend ETFs?
Dividend ETFs are exchange-traded funds that focus on holding a range of dividend-paying companies.
For public companies, one of the simplest ways to communicate financial stability to shareholders is through cash dividend payments. The most established companies often share a portion of their profits with investors, rewarding them with cash dividends. This is useful for investors as it provides a passive income stream in return for their investment.
The fund manager for a dividend ETF selects companies for their specific attributes, such as the type of company, the sector it operates in, and the company’s size, as well as whether it is a dividend-paying company.
Fund managers will group all those companies in a basket of holdings representing different investment categories which then follow a specific dividend index.
Every holding in a particular ETF will have a similar profile. As with any other funds across the ETF market, the fund manager puts together a portfolio of stocks to match the composition of a particular index.
For example, this might be the FTSE UK Dividend+ Index, or the S&P UK Dividend Aristocrats index.
If you decide to invest in a dividend ETF, you will have to make the decision on what investment category you would like to invest in. This will then determine the varying degrees of risk and returns you may receive.
For retail investors, ETFs are convenient because they provide instant diversification at low costs. However, professional investors may still prefer to choose actively managed funds.
How to invest in dividend ETFs
It’s quick and easy to invest in dividend ETFs. Simply follow these five steps below so you can start investing today.
1. Open a brokerage account
You will need a brokerage account to buy and sell ETF units. This can easily be done online. Many brokerage accounts have no account minimums, transaction fees, or inactivity fees.
Make sure you search around for the best broker or investment platform for you.
2. Find and compare dividend ETFs with screening tools
Once you’ve opened your account, it is time to decide what type of ETFs to buy. You need to ensure you compare key features, such as their annual dividend yield, expense ratios and, if they are a high-yield ETF, their track record for the past year, and where they invest.
After identifying those key features, it is then time to consider whether that ETF will help you meet your investment goals.
3. Place the trade
Buying ETFs is very similar to buying stocks. You will need to access the trading section of your brokerage website, and once you have found an ETF you would like to invest in, use the ticker symbol next to the chosen ETF to buy it.
4. Choose the number of units you would like to buy
Once you have found your chosen ETF, simply input the number of units you would like to purchase.
Remember to double-check how many you’re buying on the confirmation screen so you only purchase as many units as you want – after all, you don’t want to end up with 50,000 units when you only wanted to buy 50!
5. Confirm your purchase and keep an eye on your investment
That’s it! Confirm your purchase and you’re officially invested in dividend ETFs.
Remember to keep an eye on your investment so you can buy more units or sell your holdings if it doesn’t perform as you want it to. You can view your ETF’s performance on your brokerage’s website or by searching for it on Google.
What are the advantages of dividend ETFs?
There are various different advantages to investing in dividend ETFs. I’ve outlined a few of these below.
-
Creates a revenue stream
Dividend income is generated when companies pay out a proportion of their profits as cash. The ETFs gather these dividends on behalf of their investors and periodically hand them out (or reinvest them) at multiple points in the year.
That means you can generate a regular income from your investment, making them ideal for income investors.
-
Diversification
As ETFs are funds, you don’t just invest in one asset, but rather in many all at once. That means you can achieve broad exposure to a variety of assets in a single investment.
-
Provide stable returns
Companies can stop paying dividends at any time but, thanks to the diversification of a fund, dividend distribution is generally guaranteed. This is because, even if one of the assets doesn’t give a dividend for some reason, you will still benefit from the dividends coming from the rest of the fund’s assets.
This can be preferable to buying an individual dividend-paying company that then cancels its payments.
-
Convenience
ETFs are easy to buy and sell on stock exchanges throughout the day – hence the name “exchange-traded fund”.
What are the disadvantages of dividend ETFs?
Of course, as with any investment, there are also downsides to investing in dividend ETFs. Continue reading to find out what these are before you invest.
-
Annual dividend yields will differ between ETFs
Just like dividend stocks, yields can change over time. That means finding ETFs with a consistently high dividend yield can be difficult.
-
The value of the ETF will fluctuate over time
As well as possibly gaining in value, your ETF units can also lose value. So, even if the distribution of the dividend is almost always guaranteed, the value of your investment might reduce over time.
-
Dividend ETF income can be unpredictable
Many companies within each fund adjust their dividend payments up and down throughout the year which can make budgeting difficult.
Additionally, you may be less likely to see capital growth on your investment. So, if you’re investing for growth rather than income, you may want to consider a different ETF.
-
Potentially higher fees
Fees for ETFs are typically cheaper than buying individual stocks, but can still add up over time, especially if you’re investing large amounts regularly.
Dividend ETFs FAQs
What is the best high-yield ETF to watch in the UK?
Are dividend ETFs worth it?
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
- Learn how to invest in the FTSE100
- Have you considered transferring your pension?
- Find the best trading platforms
