Dividend-Weighted ETFs and Your Investment Portfolio
Not all dividend-paying companies are an equally lucrative proposition, on account of differences in cash-flows and approach. While mature firms with large cash flows may offer a stable, conservative approach to dividend pay-outs, growth-oriented firms are another story. The latter have aggressive expansion plans and raise dividends, though they are also prone to volatility. If the best ETF with dividends is selected though, the investors benefit from the most efficient money management solution.
Researching and selecting the right stocks is a must. But ETFs must showcase transparency of strategies and knowledge about their holdings. Well-diversified ETFs with dividends additionally protect investors from putting their eggs in one basket and concentrating only on a single firm or sector.
An equally weighted portfolio of around 9 stocks delivers a considerable loss if one to 3 of these suffer a price decline. In contrast, dividend-oriented equity ETFs hold close to 30 stocks. Winners can offset losing trades easily. Consider this example. Two of the most popular yield-focused equity ETFs are iShares UK Dividend and SPDR UK Dividend Aristocrats. While IUKD charges 0.4%, UKDV charges 0.3%. This is in direct contrast to a hefty 0.95% charged on an average by actively-managed ETFs.
Top 3 ETF Broker Comparison
Best ETFs for Income-Seekers
Not all ETFs offer market or strategy exposure to the same degree. This is more so while moving away from plain market-capitalisation-weighted exposures. Some dividend-screened equity ETFs may even focus on squeezing the highest payout possible. Others may have a more balanced approach, choosing companies offering a stable income as well as long-term capital growth. Consider IUKD, for example. The iShares dividend yield of 5.03% may appear to be a good choice for the best ETF portfolio. After all, the ETF portfolio comprises top 50 high-yielding UK stocks. But the index this ETF tracks ranks stocks as per the promised yield alone.
No effort is made to evaluate the debt levels of companies or assess how they will remain profitable. This raises the problem of dividend traps. While the so-called best performing ETF may appear profitable, the truth is that a company may promise dividends it simply cannot afford. During the 2008 financial housing loan mortgage crisis, this came to be.
The ETF suffered heavy damages from holding stocks in EU banks that suspended high dividend payouts. The absence of sustainability screening makes this a bad choice for those seeking the best ETF with dividends that are stable. UKDV, on the other hand, tracks an index holding 30 firms consistently raising or maintaining stable dividend payouts over 10 or higher consecutive years. These are companies that offer stable dividend payouts, as against the promise of high returns that never materialise.
Consistency Versus Yield
An analysis by Morningstar reveals that companies in this ETF portfolio show lower debt and better profitability characteristics. But consistency comes at the expense of a lower yield. The SPDR ETF stands at 3.97%, for example, But for those looking for financial stability and the best performing ETF with dividends, the search ends here. Where passive funds are concerned, the strategy defining the index must be examined. Due diligence on these benchmarks should guide your fund selection.
While an investment in a high dividend-yielding stock gives your solid returns, regular income is also important. Dividends paid by economically strong and profitable companies present an attractive investment option. Within the EU and UK, there are several suitable ETFs that can fit the bill. The largest European dividend ETF by fund size in GBP is UKDV. Next is iShares. The third best ETF portfolio is seen in the case of Xtrackers EURO STOXX Select Dividend 30 UCTIS-ETF.
But when it comes to the cheapest EU dividend ETF by total expense ratio, Franklin LibertyQ European Dividend UCITS is the best at 0.25% per annum. The iShares MSCI Europe Quality Dividend ETF is next followed by the UBS ETF in a ranking by Morningstar.
Best EU and UK ETFs with Dividends
- The EURO STOXX dividend ETF selects 30 EU companies ad stocks based on historical dividend yield. Stocks in the index are weighted by indicated dividend yield. MSCI EMU High dividend yield index includes 34 companies chosen for dividend strength and quality factors. Maximum weight per individual stock is 5% and stocks in this index are weighted by the free-float market cap. The SPDR index also makes it to the best performing ETF list, on account of long-term and stable dividend growth.
- Pre-defined yield criteria must be met for this index. While choosing the right dividend ETF, consider size, cost, age, income and replication methods. In the UK alone, income investing is really popular with the UK listed firms recording a payout of £94billion in dividends in 2017-2018! Researching and building the best ETF portfolio is critical. Fees on actively managed income funds, on the other hand, eat into your dividends.
- Income-focused ETFs have gained in popularity on account of what they bring to the table. These funds are diversified and easily bought and sold. They are typically easy to trade and low-cost investments such as the iShares ETF. IUKD selects 50 top-yielding companies in the FTSE 350 index sans investment trusts. Liquidity screens are applied. The UKDV ETF is a member of the S&P Europe Broad Market Index. For stocks picked, the yield cannot be more than 10 percent of the index reference date for rebalancing.
How to Judge An ETF With Dividends
Different approaches these indices adopt result in different yields, with iShares being more diversified. But what benefits you costs more too. This ETF charges 0.4% which is 0.1 percentage points higher than UKDV. This does not mean that iShares or UKDV, for that matter are better choices for you. Suitability of an investment product depends on the individual. Moreover, past performance does not guarantee results in the future. So how do you go about choosing the best ETF portfolio? Carry out asset allocation, geographic allocation and select the most appropriate ETF thereafter. Choose an ETF that gives you the exposure and diversification you seek. Investors should also establish if prospective ETF investments are ISA eligible for tax efficiency.
Assess the risk you want to take on and compare allocation relative to 100% global equity allocation. Avoid positioning yourself as a forced seller of assets at stressed valuations, and work out the income possible without limiting capital growth. Presently, while global equities yield 2.2%, UK corporate bonds at pegged at 2.5%.
While the UK market has high yields relative to others, total returns lagged global equities over 5 and 10 year periods of late. Income investors, therefore, need to be realistic without limiting growth. The £5 billion iShares Core FTSE 100 stands out as an ETF with TER/total expense ratio of 0.07% and a 4.1% yield. Another great choice is the SG Global Quality Income with a TER of 0.45% and 4.3% yield.
The Global Picture
For indices like the Dow Jones Global Select Dividend, stocks are ranked by indicated dividend yield and meet demands for dividend quality and liquidity within a year, as compared to the 5-year average. This ETF includes 100 stocks from only developed economies. The weight of individual companies is capped at 10%. The highest dividend stocks of developed and emerging economies worldwide are included in the FTSE All-World High Dividend ETF.
This index reflects the highest dividend yields for 50% of the global markets. With 1277 companies on board, this is the largest dividend index. This dividend index is weighted by the market cap of selected companies.
The S&P Global Dividend Aristocrats Index aims at sustainability and long-term dividend growth. Companies are included only if they meet the criteria of 10 consecutive years of controlled dividend policies with stable/increasing dividends. Pre-defined yield criteria must also be met. This dividend index trades stocks from developed and emerging countries, including 11,603 stocks in total. Comprehensive quality criteria are also the basis of the SG Global Quality Income Index. This is the index that considers dividend yield based on analyst consensus. Another feature is the equal weighting of all selected dividend stocks.
A Question of Dividend Cuts
The oldest and largest ETF in the UK is iShares. Dividend cuts are a problem for this and other such ETFs. This is because there were more than 13 dividend cuts in FTSE 100 alone in the past year. Most of the cuts were preceded by share price falls. As a result, the ETF is below its 2015 peak. A way to counter this is to choose dividends that are sustainable and ETFs that offer stability. The UKDV and the Source FTSE RAFI UK Equity Income Physical ETF offer sustainable dividends.
For international exposure, consider the DB X-trackers Stoxx Global Select 100 UCITS ETF. It has dividend paying companies from the STOXX Global 1800 Index with non-negative historical 5-year dividend per share growth rate. The dividend to EPS ratio is less or about 60 to 80% depending on the region. Invesco Powerhouse also offers ETFs that yield high dividends amid low volatility. Low-cost investing has seen fees fall and trading spreads narrow.
The top players in the field offer investors tight spreads, liquidity, and something different from conventional market cap weight index. IUKD, for instance, has an average bid-ask spread of 0.03% and a market cap of £4.9 billion. Vanguard VMID is an ETF with an average bid-ask spread of 0.19% and low TER of 0.1%. The UKDV SPDR ETF offers low cost investing options to a broader UK equity market. Investors who seek re-investing of dividends without fees should choose this ETF.
Moving Past Traditional Market Cap Indices
For those seeking a shift from traditional market cap indices, the XFEW ETF from Deutsche Bank or the DB X-Trackers FTSE Equal weights is a good option. This ETF gives each share in the FTSE Index a position of 1%. It also offers rebalancing every six months, taking away the concentration risk the FTSE 100 has at the top of the index. More exposure to smaller companies is its USP.
But it has an AUM/assets under management of £17.8 million that is small for big investors. The UBS ETF (IE) MSCI UK IMI Socially Responsible UCITS or UKSR ETF is perfect for those wary of oil and mining companies. Launched in 2014, this ETF has a low TER of 0.28%. More impressively, it outperformed FTSE All Shares by as much as 5.6% up to April 2017.
Moving past conventional forms of ETF investing is essential if investors seek to innovate, staying ahead of the markets and shifting economic conditions. Most ETFs with dividends either offer high payouts or higher sustainability than their peers. Your aim should be to choose an ETF with dividends that combines the best of both worlds.