ETFS Discover three dividend ETFs for straightforward and low-cost access to income

Discover three dividend ETFs for straightforward and low-cost access to income

Shares has identified three products with yields above 4% and with maximum annual charges of 0.4%

Asurge in global inflation has forced central bankers to start raising interest rates. However this has not yet translated into significantly higher returns on cash deposits for savers.

Investors continue to inhabit a world characterised by abnormally low interest rates, which poses a conundrum for those looking to generate an income from their money.

High-dividend ETFs or exchange-traded funds, offer income-seeking investors a low cost way of achieving this goal.

To help with idea generation Shares discusses three dividends ETFs that offer yields above 4%, with maximum ongoing charges of 0.4%

Our trio of trackers are iShares UK Dividend ETF (IUKD), Wisdom Tree UK Equity Income ETF (WUKD), and SPDR UK Dividend Aristocrats (UKDV).

ISHARES UK DIVIDEND ETF

A notable and appealing feature of the iShares UK Dividend ETF is its 6.6% yield.

This is marginally higher than the 6.4% yield offered by Wisdom Tree UK Equity Income ETF, but noticeably more generous than the 4% yield provided by the SPDR UK Dividend Aristocrats ETF – though the latter also captures dividend growth.

The £879 million fund has delivered a return of 6.75% over one year and an 11.7% return over a three-year period.

It tracks the FTSE UK Dividend+ index, which is drawn from a universe of the top 250 companies by market capitalisation from the FTSE 350. 50 stocks with leading dividend yields are selected by ranking them in descending order using a combination of one-year historic, and one-year forecast dividend yields.

A risk with a product which purely tracks high-yielding stocks is that a high yield can be a signal that a pay-out is vulnerable to being cancelled or cut.

However, no stock can have a weighting of more than 5% in the index – which helps reduce the risk of performance being badly affected by one constituent cutting their dividend.

SECTOR BREAKDOWN AND KEY EQUITY HOLDINGS

The financials and consumer staples sectors together constitute nearly 50% of the fund’s exposure. The former comprises a little below 30% and the latter a touch shy of 20%.

The high consumer staples weighting differentiates the fund from its peers and is reflected in the fund’s list of top holdings, specifically the 5% and 4.78% respective weightings in tobacco stocks British American Tobacco (BATS) and Imperial Brands (IMB).

Year to date both BATS and Imperial Brands have performed strongly, rising by 23.9% and

13.9% respectively.

Neither of the aforementioned tobacco stocks feature in the top holdings list of either the Wisdom Tree UK Income ETF or the SPDR UK Aristocrats ETF.

The strong performance of tobacco stocks has in part been due to their ability to raise prices. This is a powerful attribute in the current period of rampant inflation.

There are two reasons for this. First, tobacco is addictive which makes it hard for customers to quit. Consequently demand for cigarettes tends to be inelastic, meaning that the demand for the product doesn’t change in response to an increase in price.

Another explanation for the industry’s ability to raise prices lies in its market structure. Consolidation in the sector has created three dominant players in Altria (MO:NYSE), Philip Morris (PM:NYSE) and British American Tobacco.

WISDOM TREE UK EQUITY INCOME ETF

The appeal of the 6.4% dividend on offer from the Wisdom Tree UK Equity Income ETF has not been matched by its recent performance.

The fund has recorded an uninspiring oneyear performance of -2.51% and a three-year performance of -7.3%.

It tracks the Wisdom Tree UK Equity Income index. The index is comprised of the highest dividend yield UK companies using an equal weighting quality and momentum risk filtering scoring system.

Specifically companies are selected that have dividend yields in the top 33% within the UK market. Companies that pay higher dividends are more heavily weighted.

Sector exposures for dividend ETFs

Sector Weighting (%)

iShares UK Dividend ETF Financials

29.3% Consumer staples 16.9% Basic Materials 10.8% Wisdom Tree UK Equity Income ETF Financials Basic Materials 23.4% 16.4%

Utilities SPDR UK Dividend Aristocrats Financials 15.9% 28.3%

Industrials

19.2% Consumer staples 15.7%

Table: Shares magazine • Source: JustETF, 21 July 2022

Performance and fees for dividend ETFs

ETF

One-year performance Three-year performance Ongoing charges

iShares UK Dividend ETF

6.8% 11.7% 0.4% Wisdom Tree UK Equity Income ETF −2.5% −7.3% 0.3% SPDR UK Dividend Aristocrats 0.1% 7.4% 0.3%

Table: Shares magazine • Source: Just ETF, 21 July 2022

MATERIAL MINING EXPOSURE

The fund’s relatively high exposure to the basic materials sector (16.7%) is a key point of difference versus its peers.

The Wisdom Tree UK Equity Income ETF has a 16.7% weighting to the basic materials sector.

The iShares ETF for example has a 10.6% basic materials weighting, and the SPDR UK Dividend Aristocrats has a 6.3% weighting.

The two key equity holdings in the ETF are Anglo American (AAL) and Rio Tinto (RIO) with weightings of 4.1% and 3.97% respectively.

Both of these stocks have encountered selling pressure in recent six months, falling by 25.4% and 14.8% respectively on a six-month view.

On a one-year basis it is broadly flat, and on a three-year basis it is up 7.35%. The fund offers a current dividend yield of 4.03% with ongoing charges of 0.3%.

The ETF tracks the S&P UK High Yield Dividend Aristocrats index, which measures the performance of the UK’s 40 highest dividend-yielding companies within the S&P Europe Broad Market Index (BMI) that have also raised or maintained the shareholder reward for at least the last seven consecutive years

From a sector exposure perspective the SPDR ETF and the iShares ETF are similar in that they have both have significant exposures to the financial sector. The former has a 29.3% weighting and the latter 28.3%.

SPDR S&P UK DIVIDEND ARISTOCRATS ETF

The performance of the SPDR UK Dividend Aristocrats ETF is ahead of Wisdom Tree’s ETF, but behind the iShares UK Dividend ETF.

By Mark Gardner Senior Reporter

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