Take the Invesco US High Yield Fallen Angels (LSE:FAHY), iShares EM Dividend (LSE:SEDY), and iShares World Equity High Income (LSE:WINC) funds. Want to know what makes them top funds to consider in an ISA for dividend income?

Bond power

One problem with investing in shares is that dividends are never, ever guaranteed. Invesco US High Yield Fallen Angels takes this problem out of the equation. How? By focusing on generating income from corporate bonds.

This isn’t a completely risk-free strategy, however. And especially as this fund focuses on below-investment-grade bonds that yield greater levels of income. However, the portfolio’s structured in a way as to reduce the risk of default on investor returns.

In total, the ETF holds 71 different bonds, and no single holding makes up more than 5.2% of the fund. This significantly spreads out risk.

Based on a 6.6% dividend yield, an £5,000 investment here could yield a £330 passive income this year.

What about equity funds?

The iShares EM Dividend ETF focuses — as its name implies — on generating income from emerging market shares. More specifically, it holds shares in 100 companies with the highest dividend yields. These range from Brazil and China, to South Africa and the Czech Republic.

The advantage? The fund has the potential to deliver stunning long-term capital growth along with reliable and large dividends. Be mindful, though, that its focus on development markets can lead to greater share price volatility at times.

That said, with exposure to a number of different industries, the likelihood and scale of such volatility is greatly reduced. Holdings include healthcare, telecoms, consumer staples, and real estate companies.

A £5,000 lump sum investment here might provide £255 in dividends this year, reflecting the fund’s current 5.1% yield.

Double-digit dividend yields

iShares World Equity High Income offers the highest dividend yield of these three top funds. It also offers the best diversification, in my view, which can improve an investor’s chances of a reliable income.

Like the iShares EM Dividend ETF, this fund offers exposure to a multitude of industries including information technology, financial services, healthcare, and telecoms. But that’s not all — the 468 dividend payers it holds are located across global stock markets, providing better geographical diversification.

This iShares fund has another trick up its sleeve, too. It also holds cash and US Treasuries. This boosts dividend visibility and reduces the chances of it sinking in value if broader stock markets fall.

Taking into account the ETF’s 10.1% dividend yield, £5,000 invested here could provide a £505 income this year.

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Footsie shares such as these can be excellent for dividends, often supported by their market-leading positions in mature sectors and robust financial foundations. Yet investors who concentrate solely on UK large-cap stocks may be missing out on excellent investment opportunities elsewhere.

2 top income stocks

Take the following two dividend stocks, for instance. Each carries a large forward dividend yield that comfortably beats the FTSE 100 average of 3.6%. They also look in good shape to continue growing shareholder payouts beyond the near term and I feel they’re worth considering.

Dividends are never, ever guaranteed. But if City forecasts for these companies prove accurate, a £20,000 investment spread equally across these three shares will provide a passive income of £1,360 this year alone. That’s based on an average yield of 6.8%.

Brilliant bank

Lion Finance isn’t as popular as the FTSE 100’s high-yield banks. But its dividend yield for this year is far ahead of those of any of the UK’s blue-chips like Lloyds, NatWest and Barclays.

With a CET1 capital ratio of 17.1%, the FTSE 250 company looks in good shape to hit this year’s dividend forecasts too.

Looking further out, I feel that Lion Finance’s focus on the Georgia’s booming banking market will allow it to keep delivering sector-beating dividend growth. The total payout rose 12.5% year on year in 2024, driven by a 31.2% improvement in pre-tax profits.

Be aware though that fierce competition could impact future profits. TBC Bank and its huge investment in digital banking in particular poses a not-insubstantial threat.

Top fund

As I say, dividends are never a sure thing. Even companies with decades of income stability behind them can falter when internal or external pressures emerge. This was certainly the case with Shell, which cut cash rewards for the first time since 1945 during the pandemic.

Investors can reduce the impact of such events by buying an exchange-traded fund (ETF) like the iShares EM Dividend ETF. With holdings in 115 different businesses, it still has the strength to provide large dividends even if one or two holdings disappoint.

As the ‘EM’ in its name implies, this particular fund invests in emerging market companies with enormous dividend yields. It has especially substantial holdings in Brazil and China, with other prominent territories including Indonesia, India and Poland.

One potential drawback in the near term is its high exposure to cyclical shares. Major holdings include energy companies (like Petrobras) and financial services businesses (including China Construction Bank).

Yet over the long term, I’m optimistic it could deliver excellent returns, thanks to its developing markets’ rising wealth and growing populations.

The post 6.8% dividend yield! Consider these 2 ‘secret’ passive income stocks to target a £1,360 payday in 2025 appeared first on The Twelfth Magpie.