The Motley Fool

3 UK dividend ETFs income investors will love

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Shopping cart with boxes labelled REITs, ETFs, Bonds, Stocks
Image source: Getty Images.

Growing numbers of investors are being drawn to exchange traded funds, lured by low-costs and the potential for better returns. The investment vehicle is attracting investors of all kinds, with individuals in particular increasingly opting for ETFs instead of traditional actively managed funds.


ETFs offer investors a way to get invested in a diversified portfolio of investments by tracking various market indexes. The vast majority of investors focus on ETFs that seek to replicate the performances of popular stock market indexes such as the FTSE 100 and the S&P 500, but there’s also been a rise in the number of ETFs that track a different kind of index, in which stock weights are not (solely) determined by market capitalisation.

5 Stocks For Trying To Build Wealth After 50

Markets around the world are reeling from the coronavirus pandemic… and with so many great companies trading at what look to be ‘discount-bin’ prices, now could be the time for savvy investors to snap up some potential bargains.

But whether you’re a newbie investor or a seasoned pro, deciding which stocks to add to your shopping list can be a daunting prospect during such unprecedented times.

Fortunately, The Motley Fool UK analyst team have short-listed five companies that they believe STILL boast significant long-term growth prospects despite the global upheaval…

We’re sharing the names in a special FREE investing report that you can download today. And if you’re 50 or over, we believe these stocks could be a great fit for any well-diversified portfolio.

Click here to claim your free copy now!

These ETFs are typically known as smart-beta ETFs, and they offer many of the benefits of active management but at substantially lower costs. For such funds, stocks can be weighted by other equity attributes, such as volatility, momentum, value, quality or dividend yield.

Dividend ETFs

For dividend investors, ETFs that focus on stocks with high dividend yields may offer an attractive way to get more exposure to dividend-paying stocks. However, it’s worth bearing in mind that there are quite a few different dividend ETFs on the market today, so finding the best fund for your own needs is very important.

Some dividend ETFs follow very different approaches in selecting dividend stocks for their portfolios, meaning returns between individual dividend ETFs may vary substantially, even if they operate in the same equity space.

With this in mind, I’m taking a closer look at how three different UK dividend ETFs construct their own equity income portfolios.


The iShares UK Dividend UCITS ETF (LSE: IUKD) uses one of the simplest approaches to building its portfolio of dividend stocks. It seeks to give investors diversified exposure to high-yielding UK companies, by investing in the 50 highest-yielding stocks from the FTSE 350 Index.

Companies are picked by their forecast one-year dividend yields, giving the ETF a forward-looking aspect. And once 50 constituents have been selected, index weights are calculated by the forecast dividend yields for each stock, such that the higher-yielding companies make up a proportionately bigger share of the fund’s assets.


This approach allows the ETF to regularly earn very high dividend payouts, which in turn enables it to distribute high income returns to its shareholders. As such, the ETF boasts one of the highest yields from the UK equity space, with a distribution yield of 5.2% at the writing

However, this approach has also met its criticisms. Through investing in the top one-seventh of the FTSE 350 Index by yield, and by not screening stocks based on the sustainability of their dividends, the ETF exposes investors to potential dividend traps.

Just because a stock has a high yield, it doesn’t necessarily make it a good dividend stock — as when a high yield looks too good to be true, the risk of a dividend cut can also be very high.

Dividend track records

Meanwhile, the SPDR UK Dividend Aristocrats ETF (LSE: UKDV) seeks to achieve a balance between seeking high-yields and companies that are likely to maintain their dividend payouts.

It only considers companies that have consistently raised or maintained dividend payouts over a period of 10 or more consecutive years. As such, it uses a company’s dividend track record to screen out companies that have not proven themselves as reliable dividend payers.

As expected, there are big differences between the stocks held by the SPDR ETF and the above iShares ETF. iShares’ top two holdings, Inmarsat and Centrica, which each account for more than 3% of its total assets, simply do not feature in the SPDR fund, due to dividend cuts in recent years. There are, of course, many overlaps too, such as SSE and Imperial Brands, which are both listed high up in the two fund’s top holdings.

Fewer holdings

In addition, the SPDR ETF invests only in 30 companies, substantially fewer than the iShares ETF, due to its smaller investible universe and the desire to maintain a high average portfolio yield. But unsurprisingly — and despite its fewer holdings — the SPDR fund still has a considerably lower distribution yield of just 4.2%.

The past performance of the SPDR fund has lagged behind its iShares rival too, with a total return over the past five years of just 27% comparing rather unfavourably to the iShares’ performance of 40% over the same period. That said, due to the fund’s seemingly more defensive stock selection methodology, the SPDR could, quite possibly, outperform its rival in a market downturn.

There is another key advantage of choosing the SPDR fund over the iShares option — that is the cheaper cost structure. SPDR has an ongoing charges figure (OCF) of 0.30%, against iShares’ 0.40%.

Quality screener

My final consideration in the UK equity income space is the BMO MSCI UK Income Leaders UCITS ETF (LSE: ZILK). This fund, which was launched only back in November 2015, uses a fairly innovative method to pick out quality income stocks.

It utilises a two step screening process to pick out stocks based on ‘quality’ fundamental attributes, which include a high return on equity, stable year-on-year earnings growth and low financial leverage. The top 50% of constituents of the MSCI UK Index that score highest on three fundamental attributes are then screened by their dividend yield, to pick out only 25% of the total number of constituents from the MSCI UK Index.

Encouraging performance

It’s still too early to say whether this innovative approach to selecting high-quality dividend stocks is effective over the long run, although the fund’s recent, albeit short-term, performance is encouraging. Since its inception less than three years ago, this BMO fund has delivered a cumulative total return of 21%. The fund is also the top performer of the three dividend ETFs considered here today over the year-to-date, one-year and two-year time periods.

Charges for the BMO fund lie in the middle the two other funds, with an OCF of 0.35%.

Is this little-known company the next ‘Monster’ IPO?

Right now, this ‘screaming BUY’ stock is trading at a steep discount from its IPO price, but it looks like the sky is the limit in the years ahead.

Because this North American company is the clear leader in its field which is estimated to be worth US$261 BILLION by 2025.

The Motley Fool UK analyst team has just published a comprehensive report that shows you exactly why we believe it has so much upside potential.

But I warn you, you’ll need to act quickly, given how fast this ‘Monster IPO’ is already moving.

Click here to see how you can get a copy of this report for yourself today

Jack Tang has no position in any of the shares mentioned. The Motley Fool UK has recommended Imperial Brands. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Our 6 'Best Buys Now' Shares

Renowned stock-picker Mark Rogers and his analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply click below to discover how you can take advantage of this.