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Can I simplify my passive income for 2022 with this dividend-paying ETF?

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Passive income is regular income from an asset, like a stock, that requires little effort or maintenance. I’m constantly on the hunt for hands-off returns and in  2022, I’m once again looking at long-term dividend streams.

There are some fantastic high-paying dividend stocks in the FTSE 100. However, I’m a fan of exchange traded funds (ETFs).

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ETFs are funds that track an index or sector and can be bought and sold like shares through most online brokers. They allow me to invest in multiple companies in a single fund and are usually low-cost. 

My pick

The one I’ve been exploring is SPDR S&P UK Dividend Aristocrats ETF (LSE:UKDV). As the name suggests, this fund tracks the S&P UK High Yield Dividend Aristocrats Index.

This index follows the 40 highest-dividend-yielding UK companies that have either increased or maintained their dividends for at least seven consecutive years. It also focuses on large firms as new entrants to the index must have a market cap of at least $1bn. The businesses also have to meet the index’s liquidity requirements.

One of the main reasons I like ETFs is the diversification they provide. This fund consists of 40 companies across several industry sectors. I believe that having a large number of companies within it provides a high degree of resilience. If any individual firm falters, because the weighting of every company is limited to a maximum of 5%, the overall downside to the ETF is limited. 

Companies in this fund are mostly large blue-chip entities across a variety of sectors such as insurance, mining and pharmaceuticals. Household names include the likes of Legal & General, Rio Tinto and GlaxoSmithKline.

The ongoing charge is a very reasonable 0.3% and in terms of passive income, the current dividend yield is 3.59%, payable biannually.

OK, that’s not a huge yield. I can find some companies within the FTSE 100 paying much bigger dividends at the moment. For example, Evraz, the steel-making and mining company, has a current dividend yield of over 11%. However, for my portfolio, I find holding an ETF a simpler and stress-free approach rather than picking individual shares.

Long-term income

No investment is guaranteed, but I’m looking for a simple, long-term income stream. I think buying and holding this fund might be easier for me over the long run than hunting for individual dividend-paying shares. This ETF rebalances each year as the index updates. This means that companies move in and out of the fund automatically, without any input from me. 

This ETF is by no means perfect. Some of these dividend-paying companies will be successful firms that have strong free cash flows. However, some will feel they have to maintain high yields to keep their investors happy even though the business is not growing. In the long run, not only will the dividends be unsustainable, but the firms could even fail.

Despite this, on balance, I’m happy to consider this dividend-paying ETF as a low maintenance, diversified, passive income stream for my portfolio.

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Niki Jerath has no position in any of the shares mentioned. The Motley Fool UK has recommended GlaxoSmithKline. 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.

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