Investing for passive income with dividend shares is becoming increasingly risky in 2025. With recessionary dangers growing, shareholder payouts could come under severe pressure if corporate earnings falter.
Navigating this challenging environment requires a thoughtful approach. One potential strategy could be to target a diversified income stream with an exchange-traded fund (ETF). With these vehicles, the broader portfolio helps reduce the impact of one or two companies cutting dividends on overall returns.
Funds can contain dozens, hundreds, or even thousands of UK and overseas shares, providing better diversification that an individual can realistically hope for by buying individual stocks. With this in mind, here are two high-yield ETFs I think demand a close look.
iShares UK Dividend UCITS ETF
At 5.2%, the 12-month trailing dividend yield on the iShares UK Dividend UCITS ETF (LSE: IUKD) comfortably beats the corresponding reading of the blue-chip FTSE 100 index.
This sits way back at 3.5%, suggesting an investment in this iShares fund may be a better choice for individuals chasing higher yields than a FTSE-tracking fund.
In total, this iShares products has holdings in 51 different UK shares. More specifically, its designed to provide “diversified exposure to UK companies to the higher yielding sub-set of the FTSE 350“.
The fund’s spread across a range of industries and sub-sectors to give it strength and provide a stable passive income across the economic cycle. Defensive plays such as British American Tobacco and National Grid are among some of its largest holdings, as are more cyclical businesses Aviva, Rio Tinto and HSBC.
There are a couple of drawbacks here. Its focus on UK shares could leaves it more regionally exposed than more global ETFs. It also contains around half the number of holdings as a FTSE 100 ETF.
But that giant yield still makes it worth serious attention, in my book.
WisdomTree Europe Equity Income UCITS ETF
For investors seeking superior geographical diversification, the WisdomTree Europe Equity Income UCITS ETF (LSE:EEI) could be just the ticket.
It’s “comprised of the highest dividend-yielding European companies,”, WisdomTree says. These are “risk-filtered using a composite risk score screening which is made up of two factors (quality and momentum) [with] each carrying an equal weighting“, it adds.
What this means is its 12-month trailing dividend yields an enormous 6.2%.
In total, the ETF has holdings in 255 different dividend shares. UK stocks are its most significant allocation, though this comprises just 20.7% of the total fund. It also provides substantial exposure to France, Italy, Spain and Germany, and a dozen more European nations.
I also like this fund because it prioritises companies with ESG characteristics, which in turn reduces exposure to long-term regulatory and reputational risks. Major holdings include HSBC, renewable energy producer Enel and Allianz.
Around 29.1% of this WidsomTree product is tied up in financial services, which may leave it more vulnerable during economic downturns. But on the plus side, it also gives the fund serious long-term growth potential. I think it’s a great dividend fund to consider.
