Exchange-traded funds (ETFs) are an excellent way for investors to diversify a dividend portfolio. The market for these funds has exploded in size over the last decade, providing ISA investors with passive income opportunities through:
- Particular dividend shares (ie high-yield companies or dividend growers).
- Specific sectors (like financial services, healthcare or real estate).
- Certain regions (such as UK or US shares or emerging market stocks).
- Different asset classes (including stocks, bonds and property).
Have £20,000 to invest in a Stocks and Shares ISA? I think the iShares MSCI Target UK Real Estate (LSE:UKRE) and Global X SuperDividend ETF (LSE:SDIP) are brilliant funds to consider. Based on current forecasts, a lump sum of this size spread equally will generate £1,615 in dividends this year alone, tax free.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice.
7% dividend yield!
The iShares MSCI Target UK Real Estate ETF generates income by holding a range of real estate investment trusts (REITs). These companies collect rents and distribute the bulk of this income to shareholders. Under REIT rules, at least 90% of annual rental profits must be paid out. That’s in exchange for tax breaks.
This particular fund holds 25 property companies in total, spread across sectors including self-storage, logistics, data centres and student accommodation. This helps it provide a stable income across the economic cycle.
Could returns disappoint if interest rates increase? It’s possible, as higher borrowing costs put a dent in rental earnings. However, the fund’s diversified approach and those REIT dividend rules mean I’m confident it can keep paying large dividends.
That’s not the only defensive tool in its arsenal. Today, more that 40% of the ETF is also invested in UK government bonds. These help the fund pay a predictable income even if its occupancy or rent collection problems spring up for its property holdings.
The forward dividend yield here is around 7%. That’s more than double the corresponding FTSE 100 average (3.1%).
Another top ETF to consider?
The Global X SuperDividend ETF offers a more international flavour, as its name suggests. Yet that’s not the only advantage it offers from a diversification standpoint.
The fund invests in “up to 100 of the highest dividend paying equities around the world“. However, these aren’t confined to one sector — indeed, it’s well diversified across a range of industries including financial services, energy, property, consumer goods and healthcare.
What I like about this is it also provides scope for better long-term capital growth than funds that are just focused on defensive sectors. Be aware though, this can also leave its share price more exposed during market downturns.
Back onto dividends, and Global X’s yield for this year is an enormous 9.1%. Based on my research, that makes it potentially the fifth-best-paying ETF in the UK today.
Should you invest £5,000 in Global X Etfs Icav - Global X Superdividend Ucits ETF right now?
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Royston Wild does not hold any positions in the companies mentioned.
