High dividend ETF options

Choosing investments to generate a passive income can be daunting. Even previously dependable businesses can cut or suspend payouts when a crisis strikes. A high yield can also be a warning sign: is it a share where the share price is low because the dividend is likely to be reduced?   For bonds, a higher yield typically means higher risk, with a greater chance of default and capital loss. 

Yield figures, at least for shares, are based on past pay outs and the current share price, and therefore may not be a good indication of the income payouts in the future. In some cases they may not be a good guide at all as dividends can be cut, deferred or cancelled altogether. It’s also the case that over the long term, it is often better to opt for a company with a lower payout but strong potential for dividend growth over time rather than chasing the highest immediate income.

Owing to these pitfalls lots of retail investors seek the diversified approach of a fund or exchange traded fund (ETF) which spreads money across dozens or even hundreds of individual shares or other investments. By holding a wide variety, funds spread risk and can offer a more consistent dividend income even if some companies held in the fund fall by the wayside.

However, it is still important to question why a headline yield appears so high for a particular sector or asset class that a fund targets. Specific areas of high yield or emerging market debt for instance may offer appealing headline income but that’s often to compensate for the risk of a significant capital loss. Taking this into account the proposition may not look nearly as attractive.

There has also been a lot of recent discussion about high‑income ETF products in the United States that boost yields using derivatives. These are not for the faint‑hearted, as they carry a very high risk of substantial capital loss – and, in any case, such US products are not available to UK investors.

With this in mind, here are two broad dividend-focused ETFs to consider for income – one global and one focused on the UK market, a strong hunting ground for dividend investors. 

These should be considered long-term investments – at least five years – and are provided for informational purposes only. They are not personal recommendations or advice on how you should invest. They are not presently part of the Charles Stanley Direct Preferred List but are under research coverage by the Charles Stanley Collective Research team who currently have a positive rating on each in the context of their respective areas.

High dividend ETFs worth considering

Fidelity Global Quality Income UCITS ETF

• GBP Share Class - Income
• Ticker: FGQD
• SEDOL: BDQZ1N9

The aim of the ETF is to track the performance of the Fidelity Global Quality Income Index, after costs. The Index is designed to reflect the performance of large and medium-sized dividend paying global companies that exhibit fundamental characteristics of quality. 

Constituents are screened using measures such as free cash flow margin, return on invested capital, and free cash flow stability, with the goal of identifying robust businesses capable of sustaining dividends over time. The companies with the highest dividend yields are then selected for inclusion.

The starting point of the index is the largest 2,000 global stocks, taking into consideration any liquidity constraints – i.e. the ease of buying the shares in the market. Alongside this ETF, investors also have the option of a currency hedged version to cancel out the impact of global currency fluctuations against the pound. 

The annual charges (measured by the OCF or ‘Ongoing Charges Figure’) is 0.40% for the non-currency hedged share class and 0.45% for the GBP currency hedged share class, both of which are competitive.

iShares UK Dividend UCITS ETF

• GBP Share Class - Income
• Ticker: IUKD
• SEDOL: B0M6306 

The ETF seeks to replicate the performance of the FTSE UK Dividend+ Total Return Index, after ongoing charges. The index comprises up to 50 companies from the FTSE 350 (excluding investment trusts) and weights them based on their one‑year forward dividend yield.

The constituents are selected for their potential to deliver higher dividends compared to other shares within the index. According to Bloomberg’s market‑capitalisation categories, the underlying holdings are approximately 64% large‑cap, 34% mid‑cap and 2% small‑cap.

Costs and trading spreads for this ETF are currently very competitive, making it an efficient way to generate an attractive income – 4.7% annually at the time of writing (variable and not guaranteed) – from the high dividend paying UK stock market.