I’m looking at this ETF for passive income right now!

As we start a new year, I’m looking at this dividend-paying exchange traded fund as a way of earning passive income

| More on:

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.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

sdf

Key Points

  • A high-dividend-paying ETF can be a source of passive income
  • Individual shares can give a higher return, but not all high-yielding companies will be winners
  • This kind of fund might offer me some downside protection

Passive income means a regular income stream that requires very little effort. In this respect, it’s sometimes referred to as ‘making your money work for you’.

The internet is full to the brim with suggestions for how to achieve this. However, one idea that interests me for my portfolio is a high dividend-yield exchange traded fund (ETF). This is a fund that tracks an index or sector and can be bought and sold like a stock through most online brokers.

The idea is simple, this kind of investment should pay me a regular dividend at certain intervals throughout the year. Then there’s also the potential price appreciation of the fund. 

What I’m considering

The ETF I’m looking at for 2022, is one I’ve studied before, iShares FTSE UK Dividend GBP UCTIS ETF (LSE: IUKD). This fund aims to replicate the return in the FTSE UK Dividend + Index by investing in the 50 firms with the highest dividend yields in the FTSE 350.

It has a low expense ratio of 0.4%, good trading volume and is large. Looking at the companies included shows just how well it’s diversified across industry sectors. For example, established big names like HSBC, GlaxoSmithKline and Vodafone are just a few of the largest holdings.

One of the main risks in a high-yield fund like this is the dividend trap. Some of these high-paying companies will be mature businesses that are great at generating free cash flows. However, some will feel they have to maintain high dividends to keep their investors happy when the company itself is not growing. In the long run, such companies could falter.

That said, there’s a 5% cap on any individual holding in the fund, this should provide resilience in case any individual company significantly underperforms. It’s exactly this kind of robustness that makes me like ETFs as investments.

Should I invest?

Looking at the performance, the fund gained around 18% over the last 12 months and around 3% year-to-date. I’m generally bullish on the 2022 outlook for the UK market and though nothing is certain in investing, it wouldn’t surprise me if this fund continues to gain.

The current dividend yield is 5.78%, which is paid quarterly. Though it’s less than some of the best dividend payers in the FTSE 100, it’s good enough for my own portfolio. The trade-off is that I’m giving up the chance of higher returns from individual stocks for the benefit of owning multiple companies through a single share. 

The fund is also rebalanced on a semi-annual basis as the index updates. In theory, this means that the ETF automatically updates with the companies with the highest returns. Rather than buying and selling shares in individual companies myself, this does it for me.

In my mind, this really is a hands-off investment. Therefore, I’m going to seriously contemplate adding it to my holdings as part of a balanced portfolio.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Niki Jerath does not own shares in iShares FTSE UK Dividend GBP UCTIS ETF. The Motley Fool UK has recommended GlaxoSmithKline, HSBC Holdings, and Vodafone. 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.

More on Investing Articles

piggy bank, searching with binoculars
Investing Articles

Up 82% in 12 months, this dividend stock still has a 5.5% yield!

This dividend stock has given investors growth and a strong yield in recent years. Dr James Fox explores whether there’s…

Read more »

British flag, Big Ben, Houses of Parliament and British flag composition
Investing Articles

Over the last 3 years, this British investment fund has delivered nearly double the return of the FTSE 100

Thanks to his specific investment approach, this British fund manager has beaten the FTSE by a wide margin over the…

Read more »

Emma Raducanu for Vodafone billboard animation at Piccadilly Circus, London
Investing Articles

Analysts reckon the Vodafone share price is still undervalued!

Our writer’s been looking at the latest Vodafone share price forecasts and assesses how the group’s performed against the targets…

Read more »

Investing Articles

Considering a Stocks & Shares ISA in 2025? Make sure to avoid these pitfalls

Mark Hartley outlines a few basic tips for investors to ensure opening a first-time Stock and Shares ISA goes as…

Read more »

Thoughtful man using his phone while riding on a train and looking through the window
Investing Articles

What will take the Lloyds share price beyond 80p?

The Lloyds share price has leapt by 40% in the last six months. It's also soared by 135% in five…

Read more »

Fireworks display in the shape of willow at Newcastle, Co. Down , Northern Ireland at Halloween.
Investing Articles

Want to become an ISA millionaire? Here’s one way to target stock market riches with £500 a month

Making a million pounds or more in an ISA doesn't have to be a pipe dream. Here's how a mix…

Read more »

Light bulb with growing tree.
Investing Articles

Could the ITM Power share price be set to soar like Rolls-Royce?

The Rolls-Royce share price has risen 10-fold since 2022. Could this under-the-radar UK growth stock deliver similar returns in the…

Read more »

Close-up of British bank notes
Investing Articles

Turn £20k into a £1k second income this summer? Here’s how!

With £20k, our writer thinks a portfolio of blue-chip shares could help an investor earn a four-figure second income each…

Read more »